With the AGM season almost upon us it will be interesting to see how many “no” votes companies get on their remuneration policies following last year’s casualties, such as Aviva and Barclays. Generally if 15% of shareholders vote against pay practices this would be seen as a problem, let alone the reputational damage this can have. So what should the Heads of Reward be advising their Remuneration committees to ensure the shareholders are voting with, and not against them?
· Top down strategic approach: shareholders want to see a Corporation’s strategy and it’s KPIs influencing the reward of its top executives. They are looking for more than just financial measures in incentives and there is a definite trend away from using only EPS or TSR, to using a combination of financial and non-financial measures. As an example for our Executive STI (short-term incentive) we have introduced a balanced scorecard directly linked to the corporate strategy, made up of 60% financial and 40% non-financial metrics (including customer net promoter score) with an accelerator (or reduction) based on individual performance.
· Performance metrics and a longer-term view: as well as a combination of financial and non-financial metrics in incentive plans, there is now an expectation that companies in both the financial and non-financial sectors should take a much longer term view to incorporate any tail risk. A three year time period for LTI (long- term incentives) is now viewed as not long-term enough and the concept of career shares vesting at the Executives retirement date are becoming popular amongst the financial institutions. Alternative solutions are to have a three year LTI performance period but then with a further 2 year deferral period before shares can be vested, or a deferral period on the STI payout as the financial sector already requires for those employees who are required to take risk in their roles.
· Simplicity (and therefore transparency): ideally this would be one STI and one LTI program with companies being creative with their target setting and performance metrics to ensure they are driving the right behaviours. This idea of one LTI program is rapidly becoming the norm in the UK with the rapid removal of stock option plans in favour of performance shares. Share matching schemes are also less popular amongst shareholder groups not just due to the lack of transparency but “why should the Executives receive a discount on shares when the shareholders do not?”
· Quantam: above inflation pay increases and above target bonus awards for Executives are no longer acceptable to shareholders who will only support exceptional rewards where corporate performance is strong. For 2013 there is an expectation that Executive base pay increases will average at 2.5% but there will be many instances of freezing Executive pay in under-performing businesses. The NAPF in particular are threatening to vote against companies awarding above inflation pay rises.
· Clawbacks: although common practice for a while now in the banking world, other sectors are now incorporating clawback clauses in their STI plans to ensure Executives are made accountable for failure.
· Rem Co Accountability: In the future shareholders will be looking to the Rem Co to justify their decisions, especially when they exercise any areas of discretion in pay practices. They will be required to disclose how performance metrics have been set in both STI and LTI programs and declare under what conditions maximum awards will be paid.
Shareholders are demonstrating “no tolerance” to high Executive payments which are out of line with the performance of the Company and they will continue to make their views known to those who are not demonstrating good pay for performance practices.
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