What are we voting for?

15th March 2017

As we approach this year’s AGM season there is already the beginning of the perennial storm brewing in the media regarding executive pay packages. In the UK, listed companies are currently required to put their executive remuneration policies to a binding vote every three years and this year, this is happening for roughly two thirds of UK companies. There was significant media interest for this topic last year, when votes were simply advisory; with this year’s binding ones, we should be prepared to see even more activity in this arena.

While executive remuneration easily becomes a “juicy” story for the media, the real underlying issue can sometimes get lost in the rhetoric of “fat cats” and “sin bins”. Ultimately, underneath it all, the problem is that in some cases executive pay has become too far removed from company performance.

However, a one-size-fits-all solution is impossible given the variety of companies and pay structures that we now have, so what to do? The recent focus on pay ratios between the average employee and the CEO has resulted in many different suggested solutions, one of which has been a target ratio (of CEO to median pay), but many feel setting a target would be inadvisable. Not only can there be significant fluctuations across industries, but setting a fixed ratio may also become aspirational and seen to be the “desired” and regulator-approved ratio.

So is the answer incremental changes to current structures rather than a complete overhaul? Will there be a shift towards longer-term incentive plans? Will share-based rewards disappear? Will we see performance targets tightened?

What is certain is that current salary levels are unlikely to go down, although it is possible bonus payments may fluctuate. Perhaps however, given the current climate, there will be clearer rationale to any increases? Whatever happens throughout this spring, it is clear that there is a renewed and tougher stance to excessive pay from major investors, particularly given the political backdrop and rhetoric from the new government. Political as well as public tolerance for high packages has dipped and we expect to see this reflected in the votes cast. We are surely in for an eventful spring.

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