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Remuneration Committee Update The Deloitte Academy | Stephen Cahill and Mitul Shah | 2 June 2020
Agenda
Key trends 2020 AGM COVID-19
season update and
FY 2019 looking ahead
disclosures Proxy and
investor activity
The Deloitte Academy www.deloitteacademy.co.uk 2
Key trends
3
2019 disclosures and ‘policy year’
Key trends – in summary
In summary – focus on adoption of Code provisions and investor pressure on incumbent pensions
Lower bonus COVID-19
Reduced Limited
pay-outs and
incumbent structural
greater use of
pensions changes
discretion
Coronavirus puts top executives’ pay in the
spotlight Financial Times, May 2020
Coronavirus forces investor rethink on social
issues Financial Times, April 2020
Post-
Broader
Introduction of employment
recovery
ESG metrics shareholding
provisions
requirements c.50% of FTSE 100
c.30% of FTSE 250
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4
Reduced incumbent pensions
FTSE 100 (December - February y/e disclosures to date)
All executive directors
Significant shift in Best practice
practice
29% 20% 27% 13% 11%
Reduce to Some
Executives already Reduce to workforce rate No change
workforce rate from reduction
aligned with by 1 Jan 2023
2020 made
workforce
Where executive and
workforce pension are
not already aligned –
c.85% have made a Includes recent Either phased Reduction
Typically large
reduction appointments over next three made but No
banks/FS sector or
appointed on workforce years or ‘step not to reduction
where workforce rate
rate change’ at end workforce
is above 15%
of 2022 rate
7 IA Red Tops
Majority have reduced 4 ISS Against/Abstain
with immediate effect on pension (FTSE 100)
or by 1 Jan 2023
(‘IA compliant)
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Reduced incumbent pensions
25% of salary or more (December - February y/e disclosures to date)
Executive Director on 25% of salary +
Where ED on pension of Proxy response when not reducing to
25% of salary or more, workforce rate?
50% c.90% have reduced
incumbent pension
40% Material IVIS ISS
reduction RED FORx
30%
20%
No /
IVIS ISS
nominal
RED Against
10% reduction
0%
Pressure to make more
Modest
substantive gesture
c.20% c.10% reduction?
c.30% c.40% ahead of AGM?
Workforce Workforce Other No change
rate from rate by 1 reduction
2020 Jan 2023
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IVIS Red Tops/ISS Against - pensions
Voting impact?
FTSE 350 voting outcomes - companies receiving an IVIS Red Top and/or an ISS
Against/Abstain on pension
FTSE 100 FTSE 250
100% Recent ISS approach
IVIS Red Top (pensions) –
voting outcome 86-97%
90%
‘Low vote’
80%
Fairness and workforce
– broader focus
70%
60%
50%
AstraZeneca Countryside Meggitt Travis Perkins CRH Synthomer ConvaTec Group GlaxoSmithKline Intertek Group
Properties Updated guidance?
ISS
IVIS Red Tops (pension) Against/Abstain
(pension)
The Deloitte Academy www.deloitteacademy.co.uk 72019 annual bonus out-turns (FTSE 100)
Pre COVID-19…
Annual bonus pay-outs in FTSE 100 over last 5 years - % of maximum
Lowest bonus pay-outs in last
10 years (as % of maximum) –
median 60% of maximum
Increasing use of discretion -
around 1 in 5 companies
exercising discretion to reduce
formulaic out-turns
COVID-19 - FY19 bonus and
cancelled dividends (IA Bonus out-turns (as % of
Guidance) maximum) at lowest level in 5
years
‘Use of discretion or malus to
reduce deferred shares’ or ‘fully
reflect in FY20 bonus outcome’
The Deloitte Academy www.deloitteacademy.co.uk 8Increasing use of discretion
Around 1 in 5 FTSE 100 companies to date
Discretion
Bonus /
Company Upwards / LTIP
Downwards
Anglo American Downwards Bonus
Alignment with Bonus &
Macroeconomic Centrica Downwards
Fatalities workforce bonus LTIP
uncertainty
pool Significant focus in
ITV Downwards Bonus
coming year
Barclays Downwards Bonus
Overall Shortfalls in Need to increase Royal Dutch Shell Downwards Bonus
competitiveness resilience and resilience to
of compensation technology climate change Standard
Downwards Bonus
Chartered
Rio Tinto Downwards Bonus
Ensure flexibility in
Experience of London Stock award
Overall financial Exchange
Downwards Bonus
shareholders and documentation
performance
customers
Rolls-Royce Downwards Bonus
BP Downwards Bonus
RSA Insurance Downwards Bonus
Reckitt Benckiser Downwards Bonus
Evraz Downwards Bonus
Prudential Upwards Bonus
The Deloitte Academy www.deloitteacademy.co.uk 9Incentive structures – policy changes (FTSE 100)
Around 2/3rd of December year end companies have introduced a new remuneration policy
4 companies introduced a new
incentive plan (Lloyds Banking
Group, Flutter Entertainment,
9 companies (c.20%) increased
Whitbread, Standard Life Aberdeen). New incentive maximum
incentive
One company introduced a new PSP
plan
on IPO. Increase in
incentive
maximum • 4 companies will not operate
Decrease in
increased maximum in 2020
incentive
maximum • Increases typically made to LTIP
max (25%-50% of salary)
6 companies (c.15%) decreased • General shareholder support – one
incentive maximum company received ISS against
No change
Nearly all FTSE 50 • IA guidance in respect of COVID-19
‘if companies are seeking to
propose variable pay increases in
the current year, the Remuneration
Committee should carefully
consider if such an increase is
appropriate in 2020.’
The Deloitte Academy www.deloitteacademy.co.uk 10Alternative incentive structures
Recent case studies
Shareholder support Some investor dissent
Flutter Lloyd’s Banking
BHP Billiton Hammerson Whitbread BT
Entertainment Group
94.6% 93.5% 91.3% 70% 64% TBC
Deferred share model Deferred share model Restricted share plan Restricted share plan Alternative LTIP ‘with Restricted share
Restricted share plan
plan
similarities to restricted
share awards’
ISS ForX ISS ForX ISS ForX ISS Against ISS Against TBC
IVIS Amber IVIS Amber IVIS Amber IVIS Amber TBC
IVIS Amber
• Continued use of LTIP • Continued use of LTIP • 50%+ reduction in • 40% reduction in • c.33% discount to • Reduction in max quantum
alongside deferred alongside deferred quantum quantum normal maximum (50% CEO, c.40% CFO)
share model share model
• Performance underpins • Performance underpins • Performance underpins • Performance underpins
• Performance underpins • Performance underpins
• Five year time horizon • Five year time horizon • Five year time horizon • Five year time horizon
• Four year time horizon • Five year time horizon
ISS: “The new variable ISS: “The proposed policy ISS: “Although the maximum
pay arrangement provides a higher certainty award will be reduced, the
reduces the quantum of reward outcome as size of the reduction is not
and offers simplicity in compared to the existing considered to adequately
structure, and generally policy. The change is not offset the higher certainty
conforms to established considered to be of payout [..]. Questions are
good practice standards accompanied with an also raised regarding the
in the UK market.” appropriate reduction in mechanics of the plan, as
quantum opportunity.” there is limited
transparency into how
The Deloitte Academy award levels will be www.deloitteacademy.co.uk 11
determined.”Focus on non-financial metrics
ESG metrics Flight emissions 10% of annual
intensity bonus
c. 25% of FTSE 100 companies have included a new/increased ESG metric under an
incentive plan, or committed to introduce from 2021. ‘For the first time, a carbon measure will be introduced. The measure will be a
flight emissions intensity measure: grammes of carbon dioxide per passenger
kilometre, and the weighting will be 10%.’
Annual bonus LTIP
Recent Energy transition 20% of bonus,
disclosures measures 30% of LTIP
Most common approach
is 10% of bonus linked
to broad environmental
As BP’s leadership continues to develop specific strategic goals in this space,
or sustainability metrics
or sector specific metric
we are reserving committee discretion to define and communicate the
Weighting (% of award)
30% precise measures and weighting that will apply for the performance share
awards, and to adjust from cycle to cycle.
Typically FS
companies
introducing
20% broad ESG
Carbon reduction
metrics under 10% of LTIP
scorecard metrics
approach
10% Development of decarbonisation roadmaps, covering all our Scope 1 and 2
emissions to define how we will achieve our targets across all our geographically
dispersed and complex footprint.
Measurable reductions in our Scope 1 and 2 emissions over the next three
years. We have set a target of 30,000 tonnes against an adjusted 2018 baseline of
Climate-related metric (e.g. Energy transition, carbon emissions) 232,000 tonnes.
Broader ESG/sustainability metrics
Environment
20% of LTIP
metrics
Looking ahead – focus on Coronavirus forces investor rethink on social
social impact?
issues Financial Times, April 2020
12CEO pay ratios
First year of mandatory disclosure
52% - Option A
Graph shows FTSE 100 median pay ratio (●) and lower quartile to upper quartile range for all companies 32% - Option B
disclosing a pay ratio to date. 6% - Option C
FTSE 100 - Pay ratios (where disclosed) 10% - not disclosed/other
350
300
250
200
150
100
Median 76
50
High Pay Centre report
0 (summer 2020)
The Deloitte Academy www.deloitteacademy.co.uk 13Executive alignment features
Continued adoption of ‘best practice’
Significant majority of companies have implemented a formal post-
c.35% of companies have increased malus and clawback provisions
employment shareholding requirement.
IA approach 53%
Typically 100%
Serious Material Significant
shareholding for Corporate Significant
Other tapered approach 22% reputation risk financial
one year, 50% for failure HSE event
two years. damage failure loss
Other non-tapered approach 7%
Over one-half of
companies relying
No requirement / rely on good leaver on good leaver
17%
provisions provisions are not
in a ‘policy year’.
Still to be tested…
Implementation approach?
Enforceability?
14AGM season update
Early insights
152020 AGM season so far
In summary
FTSE 100 FTSE 250
96% 95% 95% 94%
Median vote Median vote Median vote Median vote
for ARR for Policy for ARR for Policy
Highest
level of c.15% of
No lost support for Two lost companies
votes ARR in votes ‘low vote’
recent on ARR
years
The Deloitte Academy www.deloitteacademy.co.uk 16FTSE 100 v FTSE 250
AGM voting – ‘low votes’ (ARR) – to date
FTSE 100 (ARR) FTSE 250 (ARR) c.15% of FTSE
250 companies
receiving ‘low
20% % of companies receiving % of companies receiving votes’ to date
‘low votes’ to date 20% ‘low votes’ to date
Lowest number of
‘low votes’ on ARR
in recent years in
15% FTSE 100
15%
50% - 80%
10% 50% - 80% 10%2020 AGM season – recent ‘low votes’
IVIS - ISS –
Company Summary of concerns Votes for
Glass Lewis
FTSE 100 (less than 80%)
Intertek Group ●●●
No commitment to reduce pension of incumbent CEO and
57% (Policy) Key issues
no formal post-employment guideline
British American
Tobacco ●●● Quantum - CEO salary increases and CFO LTIP increase 62% (ARR)
Quantum – reduction in opportunity not considered sufficient Incentive
Lloyds Banking Group ●●● enough to offset the certainty of pay-out under RSU plan
64% (Policy) Incumbent Salary
quantum
pensions increases
increases
Significant outcomes under value creation plan and salary
Ocado Group ●●● increases
70% (ARR)
Intercontinental Hotels
Group ●●● Increases to LTIP opportunity 77% (Policy)
No commitment to reduce pension for US-based
GlaxoSmithKline ●●● incumbent executive director.
73.2% (Policy)
FTSE 250 (less than 70%)
Capital and Counties Use of discretion to determine bonuses in the context of a
Properties ●●● transaction and leaver arrangements.
32% (ARR)
Key issues
Issues with bonus disclosure and no response to
Playtech ●●● historical dissent
36% (ARR)
Lack of
Diploma ●●● New CEO’s bonus not pro-rated for time actually served 56% (ARR) Incentive
Bonus response to
quantum investor
Quantum – CFO salary increases and increases to bonus and
disclosure
increases
Vistry Group ●●● LTIP opportunity for other Executive Directors
56% (ARR) dissent
Clarkson ●●● Issues with bonus disclosure 67% (ARR)
Clarkson ●●● Bonus remains uncapped and there is no deferral 67% (Policy)
Leaver Incumbent
provisions pensions
Greencore Group ●●● No commitment to reduce pension of incumbent EDs 68% (Policy)
SSP Group ●●● Outgoing CEO’s bonus not pro-rated for time served 69% (ARR) 18COVID-19 impact - update
19COVID-19 and executive reward
Market update
Deloitte Pulse Survey (March to June year ends)
FTSE 350 - % of sector % of Key findings
announcing pay cuts sector
c.50% of FTSE 100
2 companies
% of companies
Construction c.85% have announced
return to full
Travel and leisure c.70% salary as site Discretion to reduce
work resumes c.50%
FY19/20 out-turns
Banks c.65%
c.30% of FTSE 250
Media c.60%
Executive salary freeze for c.75%
Industrial goods and services c.55%
FY20/21
Transportation & business
c.55%
services
Shareholder experience Oil & gas c.40% Reduced FY20/21 bonus
c.20%
opportunity
Insurance c.35%
Technology & Telecoms c.30%
Delayed target setting for
Real Estate c.30% c.55%
FY20/21 annual bonus
Long-term sustainability /
Government support Food, beverages & household
c.30%
goods
Retail c.30% Reduced FY20/21 LTIP
c.25%
opportunity
Chemicals c.20%
Wider workforce experience Utilities c.10%
Financial services (other) c.10%
The Deloitte Academy www.deloitteacademy.co.uk 20COVID-19 and executive reward
Areas of focus
Informal cap
2020 bonus How to
Ongoing on pay – Flexibility
targets and measure
caution “windfall below board
discretion success
gains”
The Deloitte Academy www.deloitteacademy.co.uk 21Looking ahead
22Looking forward – the year ahead
Workforce and ‘fair pay’ Discretion and judgment
Pay
Lowest Employee
Employee fairness Job Year end DRR 2021 AGM
paid share
safety and pay security decisions narrative season
workers ownership
ratios
23
The Deloitte Academy www.deloitteacademy.co.ukQuestions?
24The Remuneration Consultants Group (RCG)
Independent director appointment
www.remunerationconsultantsgroup.com
25
The Deloitte Academy www.deloitteacademy.co.ukClose
26This publication has been written in general terms and we recommend that you obtain professional advice before acting or refraining from action on any of the contents of this publication. Deloitte LLP accepts no liability for any loss occasioned to any person acting or refraining from action as a result of any material in this publication. Deloitte LLP is a limited liability partnership registered in England and Wales with registered number OC303675 and its registered office at 1 New Street Square, London, EC4A 3HQ, United Kingdom. Deloitte LLP is the United Kingdom affiliate of Deloitte NSE LLP, a member firm of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”). DTTL and each of its member firms are legally separate and independent entities. DTTL and Deloitte NSE LLP do not provide services to clients. Please see www.deloitte.com/about to learn more about our global network of member firms. © 2020 Deloitte LLP. All rights reserved.
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