Executive Compensation: Trends and Considerations
February is often a key time of year for Remuneration Committees to sign off on pay review budgets. If you are finalising your papers or preparing for February meetings, read Cathryn Edmonson’s hot topics on the Remco agenda regarding Executive Remuneration in 2025.
Exec Pay has been under scrutiny for many years and is often bound up in an emotive tug-of-war. On one side, an increased focus on transparency and the social impact of Exec pay are pulling progressively harder. On the other, we are seeing a shift towards structuring exec pay with greater flexibility to ensure the UK remains competitive, particularly with the US.
The Transparency Spectrum
Transparency has been a key consideration in Executive Pay for many years but the revision of the Investment Association Principles of Remuneration in October 2024 further strengthens the requirements around transparency within the FTSE, which can often set the direction of travel for other organisations.
- There is now a requirement to be open regarding peer groups where benchmarking is used as a rationale for changes in reward.
- There is also now an expectation for openness with shareholders about any in-year adjustments to bonus targets, and to robustly explain the rationale before changes are approved.
- RemCo are also required to monitor the frequency and magnitude of discretion, and to review appropriateness.
Social Impact
As well as increased transparency, there is also growing demand for Executive Pay decisions to be made not only in line with market rates, but also in the context of employee pay and working conditions. This is nothing new, but the launch of the High Pay Centre’s Fair Reward Framework in September 2024 increases transparency around Executive Pay and makes it easier for investors to access information about a company’s social impact.
- The framework is free to use and designed to inform investors by compiling key information on pay practices.
- It covers 30 metrics in relation to the fairness of pay practices and pay outcomes.
- In September we also saw the introduction of a new global task force on Inequality and Social-related Financial Disclosures. Its aim is to build a framework that incentivises business and financial practices that create fairer societies.
- Social scientists have long argued that growing income gaps are detrimental to society and this task force is a sign of a potential shift towards practices that promote a fairer society.
The battle to remain competitive
While calls for fairer Executive Pay practices are getting louder and more frequent, there are also growing concerns over the ability of the UK to compete on Executive Pay, especially with the US.
- WTW recently reviewed changes over the last 10 years within FTSE100 companies and found that, overall, there had been restraint, with base pay increasing on average by 1.5% each year.
- Compared with America’s S&P 500 and 400, FTSE100 base pay has remained consistent, but variable pay opportunities stateside have increased more significantly than in the UK.
- This may explain some of the increased flexibility in the Investment Association’s revisions, including:
- removing the requirement for LTIP vesting thresholds not to be ‘significant’ relative to base pay, but instead to be ‘appropriate’.
- where Share Ownership requirements are met, executives with significant share holdings can receive all their bonus in cash.
Summary
Emotions around Exec pay are understandably heightened when there is a perception that pay levels appear high contrary to business performance. That could be financial performance, ethical performance or in relation to social responsibility. Keeping Executive pay proportionate to employee pay while also staying competitive is a tug-of-war that is likely to rumble on. Defining that explicit link to performance will be key in whatever stance each company decides to take.
For advice on Executive Pay, please contact Cathryn.Edmondson@innecto.com
