COMPANIES are bowing to shareholder pressure by deepening the alignment between investor goals and the temptation for short-term self-interest of senior executives.
That’s one of the key messages to emerge from Deloitte’s latest analysis of the FTSE 250, which revealed that companies have responded to investor calls for executive directors to hold shares for at least five years. Now almost a third of companies (32%) have introduced further holding periods on long-term share awards earned typically over a three year performance period.
Mitul Shah, remuneration partner at Deloitte, said: “Investor pressure and regulation have led to some significant changes in executive pay. Companies have sought to respond to shareholder concerns with measures providing a stronger alignment of directors’ interests with the long-term performance of the company. This along with improved engagement and dialogue between companies and their shareholders has resulted in the increased level of support.”
Some 60% of companies now require part of any bonus earned to be deferred for a period of time, most commonly three years. 85% of businesses have now introduced clawback and malus provisions in relation to incentive pay.
Additionally, almost a quarter (23%) of FTSE 250 companies have increased shareholding requirements for their executive directors over the past year, compared to fewer than 10% last year. 90% of companies now have formal shareholding requirements, up from 85% last year. Half of companies (50%) have stated the number of years over which the director must acquire the shareholding, typically over five years.
As part of the requirements, around half (51%) of companies place restrictions on shares earned from incentive plans until the shareholding is attained.
Shah adds: “Shareholders want to see remuneration structures which align the interests of directors with their own and are particularly looking for evidence of longer term stewardship. This has been emphasised in the recent publication by the Investment Association of the 2015 Principles of Remuneration which now specifically include an expectation that long term incentives should have a performance and holding period of at least five years in total.
“We believe that there are many different ways in which companies can achieve alignment and stewardship, through bonus deferral, longer term performance periods, holding periods, clawback arrangements and requiring directors to hold specific numbers of shares.
“All of these measures are focussed on greater alignment and the approach taken by each company should depend on their own facts and circumstances and aim to strike a balance between management interests and shareholder interests. We are seeing a significant increase in the number of companies implementing changes to the remuneration structures which are designed to encourage stewardship.”
The report found that while no FTSE 250 company has received a majority vote against the remuneration report so far this year, concern has focused on buy-out arrangements and the overall size of the package.
FTSE 250 companies are now moving towards simpler remuneration arrangements with deferred bonus matching plans only operated by 10% of companies, and were removed entirely by 11 companies in 2015, the analysis revealed. Around 85% of companies now operate only one annual bonus plan and one long term plan, compared with 74% in 2014.
Despite FTSE 250 companies demonstrating a degree of restraint in relation to a median salary increase for all executive directors of 2.3% in 2015, the median bonus level remained stubbornly high at 120% of salary. Bonus payouts were actually higher than last year with a median payout of 69% of the maximum opportunity.