Planning executive remuneration remains a key concern for shareholders during a period which presents numerous potential risks and opportunities for businesses. Increased market volatility leads to greater focus on performance-linked executive plans. Setting incentives for the coming year as Brexit negotiations unfold will be challenging. Businesses may be struggling to set long-term targets in an uncertain future trading environment. Therefore, the definition of success for executives and shareholders needs to be flexible and realistic to manage an uncertain time.
Our UK Reward Management Spring Survey noted that bonuses reflect seniority and the current ongoing focus of shareholders is the link between pay outcomes and corporate performance. Whilst the single market and customs union is being replaced with a new UK-EU trade framework, companies need to consider the impact of market volatility (including exchange rate movements) on performance conditions in annual and long-term incentive plans. The uncertainty also may be affecting the ability of companies to meet their current performance targets. Remuneration committees will need to take into account the overall performance of the business and circumstances outside the control of executives, whilst being mindful of the shareholders’ experiences. Some may be experiencing loss, but the weakening of the sterling may be beneficial to diverse international businesses with a UK presence. Ongoing dialogue with shareholders about the decisions made and their rationale will be key to maintaining shareholder support.
However, it is not just shareholders who are holding executive pay to account. The government is backing this scrutiny. Since the decision to leave the EU, pay awards have been steady, but for executive pay it continues to increase. The government’s manifesto promised a general clamp down on executive pay to tackle the income gap, where the average CEO of a FTSE 100 company earned £4.5m in contrast to the average UK worker’s salary of £28,000. The government have pledged to introduce a new register of companies managed by the Investment Association whose investors are unhappy with executive pay levels. They will name and shame companies where over 20 per cent of investors believe bosses are paid too much. Laws to force companies to publish and explain the ratio between pay of highest earner and average UK employee are being considered.