Executive pay in FTSE 350 listed companies has returned back to near pre-pandemic levels, but investor activism and inflationary pressures suggest a tough year ahead for remuneration committees.
That’s according to research from Mercer which revealed that the Covid pandemic had a “significant impact” on salaries and long-term incentives for senior executives.
Nic Stratford, executive reward partner at Mercer, said: “The pandemic had a significant impact on executive director remuneration, with many directors taking voluntary salary reductions during the worst period of the pandemic and in many cases, their 2021 bonus and long-term incentives did not pay out.
“As company performances improved into 2021, most salary reductions were unwound and bonus levels rebounded. Our analysis shows that bonus pay-outs made at 85% of the maximum possible in FTSE 100 companies, are actually higher than they were pre-pandemic.”
He explained that when many companies set targets in early 2021, the success of the UK’s Covid vaccination programme and the impact of new variants could not be confidently predicted. As such, he said many financial targets “may have been conservative, in hindsight”.
Mercer’s analysis, which used data for financial year-ends up to the end of March, also showed that investor activism in relation to executive pay and reward is on the rise with ESG targets in incentives becoming more common.
Around two-thirds of FTSE 100 executives now have ESG targets in their annual bonus and around half have them in their long-term incentive plans, said Mercer.
Shareholders continue to pay close attention to pay decisions. Companies perceived to have treated executives more favourably than employees, or viewed to have ignored the wider context and experience of shareholders, have faced public censure and low AGM votes.
“The average percentage of votes in favour of FTSE 100 executive remuneration policies at AGMs increased from 86% in 2021 to 88% in 2022,” said Stratford. “In the FTSE 250 the average increased from 88% to 93%. This does not necessarily mean that investor sentiment has become more positive though.
“It is more likely to be an indicator that shareholders have won the recent big battles to force companies to make changes to their remuneration policies and that having made those changes, the remuneration policies being put to investor votes now generally satisfy investor red lines.”
He said that only three years ago, most companies paid their executives significantly higher pension contributions than were available to employees. Investors’ demands for more alignment has led to 98% of companies now offering new executive directors pensions at the same level as their workforce.
“A similar percentage of companies have either already aligned existing directors’ pensions or have committed to do so by the end of 2022,” he said. “As a result of these changes, there is now only a 2% point difference in median pension levels for executive directors compared to the workforce average and this will have been almost completely eliminated by 2023.”
Stratford signalled that 2023 would be a busy year for companies and their investors, with the majority of FTSE companies required to hold their next vote on remuneration policies in 2023.
He also stressed that inflation would pose a challenge for remuneration committees over the next 18 months. “As inflation rises, the budgets for 2023 employee salary increases are also likely to rise,” said Stratford. “Whilst employee salary increases were running at around 2.5% to 3.0%, investors have been relaxed if executive directors receive salary increases at the same level.
“If salary increase budgets reach 5.0% to 6.0%, or even more in 2023, it is not clear that investors will be just as relaxed for executive director salary increases to be at the same level as the workforce.”