Remuneration Forum October 2014
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Transcript of Remuneration Forum October 2014
Remuneration Forum
Where next for executive pay?
1 October 2014
2014 issues and implications
Caroline Johnson
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2014 issues and implications
Simplicity and transparency
Alignment with long-term success of the business
Stre
tchi
ng p
erfo
rman
ce m
easu
res
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Alignment to long-term success
Incentive plans
■ Deferral of part of annual bonus is the norm within the FSTE 350, and over 80% of plans are mandatory deferral with no match
■ Annual bonus deferral typically three years with pro-rata vesting
■ Some evidence of new long-term incentive plans (LTIPs) with longer vesting periods or introduction of holding periods (total five years typical)
0% 20% 40% 60% 80% 100%
FTSE 100 CEO
FTSE 250 CEO
Short term Long term
Source: KPMG analysis of FTSE350 Annual Reports and Accounts 2013 - 2014.
Remuneration mix - short term:long term (actual)
0% 20% 40% 60% 80% 100%
FTSE 100 CEO
FTSE 250 CEO
Remuneration mix - short term:long term (max)
Short term
Long term
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Alignment to long-term success (cont.)
Malus and clawback
Originated in the FS sector – now incorporated into the Corporate Governance Code.
D1.1 Schemes should include provisions that would enable the company to recover sums paid or withhold the payment of any sum, and specify the circumstances in which it would be appropriate to do so.
Some confusion as to whether it is “or” or if wording will be interpreted as “and”
■ Majority of FTSE 350 companies disclose that they have malus/clawback
■ However analysis of a sample of companies shows that:
– Some companies who mention clawback in their policy, actually describe a malus clause and not clawback
– A smaller number of companies who mention clawback in their policy, do not provide any further details
■ Two thirds of new LTIPs put to shareholders have clawback and malus, a small number have no disclosure and the remainder have malus only
So some work to do on this point – consider legal and tax implications and impact on remuneration policy
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9%
150%
100%
91%
37%
100%
100%
63%
Alignment to long-term success (cont.) Shareholding guidelines
6%
235%
200%
94%
FTSE 100 ■ Set policy
guidelines ■ No policy
guideline ■ CEO
shareholding as a percentage of salary
■ Other Directors shareholding as a percentage of salary
FTSE 250 ■ Set policy
guidelines
■ No policy guideline
■ CEO shareholding as a percentage of salary
■ Other Directors shareholding as a percentage of salary
Small Cap ■ Set policy
guidelines ■ No policy
guideline ■ CEO
shareholding as a percentage of salary
■ Other Directors shareholding as a percentage of salary
Source: KPMG analysis of FTSE350 Annual Reports and Accounts 2013 - 2014.
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Stretching performance measures
■ Annual bonus payments remain significant for many companies
■ Disclosure often limited
■ This continues to be an area of concern for shareholders
CEO Actual annual bonus paid as a percentage of the maximum
0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0%
0% - 10%
10% - 20%
20% - 30%
30% - 40%
40% - 50%
50% - 60%
60% - 70%
70% - 80%
80% - 90%
90% - 100%
Percentage of Companies
Per
cent
age
of M
axim
um B
onus
O
ppor
tuni
ty
FTSE100 FTSE250 Source: KPMG analysis of FTSE350 Annual Reports and Accounts 2013 - 2014.
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Recruitment principles
Transparency: Remuneration disclosure
Discretion in the remuneration policy ■ Exceptional or genuinely unforeseen
circumstances – To make larger LTIP awards – To increase the level of annual bonus – To take actions outside of the normal policy
limits – Recruitment
Disclosure of performance targets ■ Policy includes only general
statement ■ Many companies rely on
commercial sensitivity exemption, particularly for annual bonus
■ Difficult to assess whether “stretching”
Source: KPMG analysis of FTSE350 Annual Reports and Accounts 2013 - 2014.
Additional clarification provided in a number of cases following publication of annual report
0%
20%
40%
60%
80%
FTSE100 FTSE250 Small Cap Pay in line with existing policy RemCo discretion - no cap disclosed RemCo discretion - cap disclosed
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Complexity
■ Number of performance measures used in LTIPs in the FTSE 350 is increasing
■ Over 40% of new plans put to shareholders have 3 or more measures
Source: KPMG analysis of FTSE350 Annual Reports and Accounts 2013 - 2014.
33%
42%
24%
32%
26%
41%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
One Two Three+
FTSE 350 New plans - Number of Measures
2013 2014
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The shareholder view
Percentage of companies with a significant vote against (significant=20%+)
9% 10%
9%
8%
7% 7%
5%
9%
0%
2%
4%
6%
8%
10%
12%
FTSE-All Share FTSE-100 FTSE-250 FTSE-Smallcap
Per
cent
age
of c
ompa
nies
with
sig
nific
ant v
otes
ag
ains
t
Remuneration report Remuneration policy
Source: KPMG analysis of FTSE350 Annual Reports and Accounts 2013 - 2014.
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The shareholder view (cont.)
Actual votes against policy and remuneration report (companies with a significant vote against)
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
Per
cent
age
of v
otes
aga
inst
Remuneration report Remuneration policy
Source: KPMG analysis of FTSE350 Annual Reports and Accounts 2013 - 2014.
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Issues for 2015
■ Simplicity is not necessarily possible – but it should be clear
■ Votes against the annual remuneration report should not be ignored
– although the median vote in favour remains at over 95% an increasing number of companies fall into the 80%-90% range
– shareholders will focus on use of discretion and disclosure of performance targets
– regulations require publication of votes, a summary of reasons for votes against and actions taken
– majority vote against annual report triggers a policy vote (and significant vote against likely to impact next policy vote)
■ In 2015 no requirement to include policy, but consider a summary to set context, and need a statement about implementation in the following financial year
■ Changes in best practice go beyond the main market so be prepared
Putting Executive Pay in Context
Prof. David De Cremer
KPMG chair in Management Studies
University of Cambridge
Executive pay in 2015 – what needs to change?
David Ellis Partner
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The question you dread...
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How do you pay …
1. To whom? 2. Over what period of time? 3. For doing what?
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How much do you pay …
1. Too much 2. Not enough 3. Just right
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How do you pay …
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Huge energy is expended on the efficacy of subtle tweaks to incentives
■ Compulsory deferral of bonus
■ Three to five year performance periods/deferral periods
■ Movement from EPS to ROCE (say)
■ Change from 50/50 TSR and EPS to a matrix approach
■ Move to (more) non financial measures
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Huge energy is expended on the design of the ‘next big thing’
■Use of ‘career shares’ ■ Pre grant performance measures ■ Long term holding thereafter ■ Length of pre grant performance period ■Use of post grant underpin/adjustment
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Three defining principles …
1. The longer you have to wait, the less it is worth
2. Executives are risk averse 3. Complexity destroys value
Source: Dr Pepper S., Campbell, R., 2014. Executive reward - a review of the drivers and consequences. CIPD Research
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And this means …
1. All pay structures are inefficient 2. But some of them may be useful
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How much do you pay?
Understanding the four lenses of pay
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What is the difficult piece of the jigsaw?
1. Deciding how much to pay a CEO? 2. Explaining how you have decided that
is the right amount? 3. Explaining why it is the right amount in
one year, when the pay in year is a composite of a number of years of performance?
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The ‘talent’ lens
Book Word count
1 76,944
2 85,141
3 107,253
4 190,637
5 257,045
6 168,923
7 198,227 £85m per book
7 books
£600m earnings
£553 per word
Source: Estimated based on information in public domain
Consider J. K. Rowling, author of the Harry Potter fantasy book series:
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The ‘performance’ lens
Bonus payout vs. change in profit 2013
Profit change bands Count Average %
of Max > 100% 14 86.51%
50% - 100% 13 88.12% 30% - 50% 14 88.41% 20% - 30% 13 86.36% 10% - 20% 16 84.43% 0% - 10% 9 79.35%
(10%) - 0% 11 78.85% <(10%) 17 79.87%
• One third of companies paid their CEO a bonus of 80 percent of the maximum value allowable
• One quarter of these companies experienced a fall in profit during the relevant year
Source: KPMG analysis of FTSE350 Annual Reports and Accounts 2013 - 2014.
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The ‘ownership’ lens
Source 1: High Pay Centre, July 2014. Cheques and the City: pay for top lawyers and accountants Source 2: Estimated based on information in public domain
• Average partner remuneration in accounting firms: £700k1
• Consider Mike Ashley, Executive Deputy Chairman and Founder of Sports Direct: • Opted out of
£180m bonus2
• Sold shares worth £220m
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The ‘profit’ lens
Its quite simple ... • Pay is, in part, a product
of the capacity of the business to make profit
• Businesses that have the potential to make a lot of profit, will pay more than those that do not
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The four lenses in practice
REGULATION
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And all this means …
1. We need a different language to disclose pay that views pay honestly through at least four lenses
2. We need to be able to adjust the disclosure of in year pay to reflect the longer term nature of pay
Thank you
We offer remuneration advice as part of our broader workforce offering; find out more here, or if you have any specific event questions or comments please do not hesitate to email the team.
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Contact details
Rupal Patel Director, KPMG LLP
Tel: +44 (0) 20 7694 4708 [email protected]
David Ellis Partner, KPMG LLP
Tel: +44 (0) 20 7311 2021 [email protected]
Caroline Johnson Senior Manager, KPMG LLP
Tel: +44 (0) 20 7694 1296 [email protected]
Jessica Sales Manager, KPMG LLP
Tel: +44 (0) 20 7694 5383 [email protected]
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.
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