As we reach the midpoint of the 2024 proxy season in the UK, it is now possible to discern some of the trends emerging so far in relation to the pre-season debate surrounding the competitiveness of UK executive pay, and how this has been reflected in shareholder voting.
The ongoing remuneration debate
Perhaps unsurprisingly, remuneration continues to be at the forefront of conversations in the UK corporate governance landscape. As mentioned in earlier articles, this perennial topic was reignited pre-season by the CEO of the London Stock Exchange (LSE), Julia Hoggett, who in May 2023 called for a “big tent” discussion to consider the competitiveness of executive remuneration and to ensure that UK-listed companies could attract and retain key talent. She also chairs the Capital Markets Industry Taskforce, which called for a “resetting” of UK corporate governance standards to ensure that they also consider UK competitiveness and economic growth.
This was in the wake of some high-profile departures from the LSE, including Ferguson, BHP, CRH, TUI, Flutter and Smurfit Kappa, as well as the decision of UK-based ARM Holdings to list in the US instead of London. In recent months, there has also been hearsay in relation to other possible departures from the exchange, with Indivior putting forward a General Meeting to move its primary listing to the US, and rumours of a possible exit by Shell being dampened by the Company’s CEO stating that a listing move is currently not under discussion. Nonetheless, over the past few weeks, there has been some signs of a respite, with British tech company Raspberry Pi considering a London listing and online fashion giant Shein settling for the LSE after tensions between the US and China stalled plans for a New York IPO. However, it is yet to be seen if this represents a reversal of the trend or merely a temporary halt to the departures from the exchange.
This exodus has not strictly been limited to the UK, with companies in other European markets also considering whether to make the trip across the Atlantic. For instance, in March 2023, Linde completed its delisting from the Frankfurt Stock Exchange in favour of a single listing in New York. More recently, in May 2024, French oil and gas giant TotalEnergies stated that it was “seriously” considering the possibility of a primary listing in the US.
Nonetheless, listing departures seem to have disproportionately hit those countries that share a common language with the US. Outside of the UK, the CEO of Euronext Dublin, Daryl Byrne, recently called upon the Irish Government to address the country’s stamp duty on trading in an effort to halt companies from moving their primary listings to the US following several high-profile departures from its own stock exchange – many of the companies outlined above leaving the LSE at approximately the same time as Ireland. Departures are not just being considered by large Irish companies. In May 2024, it was reported that the pharmaceutical services company and FTSE AIM constituent hVIVO had placed Irish listing under review.
It is against this backdrop that some UK institutional investors and investment bodies considered updating remuneration best practice guidance to allow for additional flexibility for companies in determining remuneration arrangements. For instance, one of the largest UK asset managers Legal & General Investment Management (LGIM)’s UK executive pay principles, which were publicly updated in late 2023, state the following:
“LGIM is aware of the discussions around executive pay competitiveness currently circulating between diverse stakeholders in the UK capital market, and we believe that our pay principles and voting policies allow the necessary flexibility to facilitate effective discussion with remuneration committees in implementing the pay structures best suited for their companies’ strategies.”
Similarly, the Investment Association (IA), in a letter sent to FTSE 350 Remuneration Committee Chairs, stated that it intended to carry out a fundamental review of its Principles of Remuneration later in 2024 to reflect evolving expectations of IA members and incorporate feedback from companies. This feedback, among other things, highlighted challenges that companies face in attracting US executives and competing more generally in the US market, particularly for larger UK companies and those that have a significant US presence or US revenues. As a result, some companies sought more flexibility regarding higher LTIP opportunities and the ability to make use of so-called hybrid schemes, which incorporate both performance and restricted shares.
Shareholder voting on hybrid plans
During the first half of the 2024 proxy season, we saw how investors voted in relation to the small number of hybrid plans tabled so far. Four companies that put forward hybrid plans have now disclosed their AGM voting results. The proposed hybrid plans were as follows:
- Smith & Nephew sought to increase the opportunity under its performance share plan (PSP) from 275% to 300% of salary and introduce a restricted share plan, representing an additional award of restricted shares of up to 125% of salary for its US-based executives, which will vest in equal tranches over a three-year period, with no minimum holding period after each tranche of vesting.
- Hunting sought to maintain the existing award opportunities available to the Executive Directors (EDs) for its long-term incentives, but to deliver part of the award as restricted shares. Of the CEO’s normal award, equal to 450% of salary, 100% of salary would be delivered in restricted shares with the rest awarded as performance shares. Of the CFO’s normal award, equal to 210% of salary, 50% of salary would be granted as restricted shares, with the rest awarded as performance shares.
- Spirent Communications sought to double the existing award opportunity under its long-term incentive from 200% to 400% of salary. Awards of up to 400% of salary could be made under performance shares or 200% of salary in restricted shares, or a combination of the two, so long as the maximum on-target opportunity did not exceed 200% of salary.
- W.A.G. Payment Solutions, like Hunting, sought to maintain existing award opportunities at 150% of salary, with half the award (75% of salary) to be delivered as restricted shares.
Other hybrid plans have also been proposed in the UK market. For instance, Puretech Health also sought to maintain existing award opportunities, with a portion of awards (normally 50%) being granted as restricted shares rather than performance shares. In addition, like Smith & Nephew, restricted share awards will vest in equal tranches over a three-year period. Nonetheless, in the case of Puretech, award tranches have a holding period of two years, in line with UK market norms. However, as its AGM is on 13 June 2024, its voting results are yet to be disclosed.
The percentage of votes cast against the remuneration policies including hybrid plans at 2024 AGMs so far are as follows:
| Company | Dissent* |
| Smith & Nephew | 43.2% |
| Hunting | 15.4% |
| Spirent Communications | 43.2% |
| W.A.G. Payment Solutions | 3.8% |
*Percentages represent disclosed number of votes cast against and do not include abstentions.
All four of the remuneration policy resolutions put forward by the companies received the majority support required to pass. Given that the failure of remuneration policies in the UK is extremely rare, this is perhaps unsurprising. The 43.2% of votes cast against both Smith & Nephew’s and Spirent Communications’ remuneration policies are considered significant shareholder dissent by UK standards. Indeed, they are more than double the threshold of dissent for UK companies to be placed on the IA’s public register. In the case of Spirent Communications, it should be noted that at the time of the vote, the Company was being acquired by private equity giant Viavi, which may have had an effect on the voting. However, following a higher offer by California-based electronics firm, Keysight, Viavi’s offer has now lapsed.
Even less surprising is the fact that both Hunting and W.A.G. Payment Solutions received far lower dissent than the other two, as they did not propose any increases to their overall long-term incentive opportunity. Moreover, in the case of W.A.G. Payment Solutions, the CEO holds a 47.7% stake in the Company while its largest shareholder, Bock Capital EU Luxembourg WAG S.a.r.l., which has a shareholder representative on its board, holds another 26%.
Finally, although not strictly a hybrid plan, it should also be noted that Ferrexpo sought the flexibility under its new remuneration policy to introduce restricted shares alongside performance shares. However, this was largely due to the nature of the Company’s current situation in Ukraine amid the ongoing war with Russia, and the need to retain and motivate its executive team during the conflict. In addition, Ferrexpo confirmed that its restricted share awards would be granted at 50% of the opportunity as performance share awards under the existing LTIP, in line with the IA’s remuneration guidance. Moreover, it stated that it does not intend to grant restricted shares and performance shares in combination, and that it intends to engage with shareholders appropriately before it returns to using performance shares.
How are investors reacting to hybrid plans so far?
When LGIM updated its executive pay principles to allow for flexibility in relation to remuneration structures for UK companies, it was characterised by some as opening the door for US-style pay arrangements. Similarly, in January 2024, when Sky News reported that the IA intended to carry out a fundamental review of its Principles of Remuneration later in 2024, the news outlet went as far as to state that the letter constituted a “green light” from the UK investor community for larger pay packages for FTSE company executives.
However, as the shareholder dissent received by the companies above illustrates, this has not been the case so far, with two of the four remuneration policies including the hybrid plans coming close to failing.
Moreover, it is noted that controversial remuneration resolutions so far this UK proxy season have not only been limited to remuneration policies featuring hybrid plans:
- Clarkson saw 43.3% of votes cast against its remuneration report, as the Company continues to operate an uncapped annual bonus scheme for its CEO. In addition, Remuneration Committee Chair, Dr Tim Martin, received opposition of 38.1% for his re-election.
- Plus 500’s remuneration report failed to pass, with dissent of 65.9%. Moreover, 28.4% of votes were cast against the re-election of Board Chair, Jacob Frenkel.
Both of the above companies have a recent history of remuneration dissent. As such, the fact that this has been repeated in 2024 is not particularly surprising.
ISS will continue to monitor developments in UK remuneration practices during the remainder of the 2024 proxy season. Remuneration arrangements will continue to be assessed on a case-by-case basis, considering the merits of the explanations provided. Post-season, we will also be considering whether the ISS UK and Ireland benchmark voting guidelines on remuneration remain appropriate in light of any possible developments in UK remuneration standards.
By: Tom Inchley
