By Jessica Tasman-Jones
This article is brought to you by Agenda, an FT Specialist publication that focuses on corporate boards
Amid a cost of living crisis, BP revealed this month that its chief executive Bernard Looney will take home £10.03mn in pay for 2022 – more than double the previous year. A big chunk of that is due to stock rewards granted in 2020 that are now due to vest.
The problem is that some share plans that are now maturing were devised in February or March 2020, when markets bottomed out due to the pandemic, so some companies awarded significantly more shares they might’ve done otherwise, says Tom Gosling, an executive fellow of finance at London Business School.
BP’s share price, for example, is now performing much better as the war in Ukraine boosted energy prices – leading to a bumper payout for Looney.
Investors are on the lookout. In a letter to remuneration committee chairs last November, the Investment Association, an industry body for UK asset managers, said in the 2023 AGM season its members would look for pay restraint amid the cost of living crisis and whether the windfall gains from share awards granted during the pandemic need to be reduced.
When the stock was awarded shareholders were clear that they expected remuneration committees to exercise discretion in revising down share awards should markets recover sharply, says Gosling. But a lot of companies will not make an adjustment, he predicts – or not to the extent that shareholders want.
"Many companies persuaded executives to cut salaries or give up bonuses because of Covid and incentives suffered because of the economic downturn. Remcos may not want to come back and have another go at executives," says Gosling.
UK annual reports show how remuneration committees have responded. At BP, for example, the committee exercised discretion for Looney’s performance share plan, dropping it by 10 per cent.
Meanwhile, ITV's remuneration committee said it was mindful of windfall gains but decided against any revisions. The committee had made an “upfront” adjustment, it argued, by basing the award on a 30-day average share price – rather than its usual three-day share price. Its final award is effectively 17 per cent lower as a result, it said.
There isn't a concrete definition of what is or isn't a windfall gain, so provided boards offer a credible rationale, they may be able to get away with not adjusting share awards accordingly, says Gosling.
But boards must consider the broader sensitivity about executive pay increases – particularly when relative to the wider workforce. "The current inflationary impact is disproportionately affecting lower-paid workers, where a greater proportion of their income will be spent on energy or food, which is seeing the greatest levels of inflation," Andrew Ninian, director for stewardship, tax and risk at the IA, wrote in last year's letter.
Chief executive pay rises in the FTSE 350 are two percentage points less than the wider workforce this year, according to WTW data analysing the first 65 companies in the index to publish annual reports this year. The median increase for chief executives was 4 per cent, with the wider workforce gaining an average pay rise of 6 per cent.
But this is still higher than the two to three per cent pay raises that had been common for executives in recent years, says Alex Little, director of the executive compensation team at WTW.
In its annual report, GSK highlighted cost-of-living support for its workforce when explaining that its chief executive, Emma Walmsley, would receive a 4 per cent raise for 2022, one percentage point lower than the wider team.
There may be pay compression between executives and their direct reports, says Little. Companies still need to pay competitively to attract and retain these people, but they do not face the same pressure from investors about their remuneration, says Little.
Companies that fully explain proposed changes and their reasons for them typically receive a better response to their pay policy proposal, says Little. This would typically be drafted by HR or company secretarial teams, with support from advisors, but ultimately the messaging for shareholders is the responsibility of the remuneration committee, he says.
