FTSE 350 executive pay returns to calmer waters, but is this merely a lull before a storm? 

London, 4 October 2022 – Research and analysis conducted by Mercer into the latest Board remuneration practices and trends of FTSE350 listed companies indicates that, while executive pay has returned to near pre-pandemic levels, the next 12 to 18 months are going to prove challenging for companies determining the next round of pay and rewards. 

Mercer’s 2022 UK Board Remuneration Handbook, which uses data for FTSE financial year-ends up to and including 31 March 2022, reveals three main themes. First, the pandemic had a significant impact on salaries and long-term incentives (LTI) for senior executives in FTSE350 companies. Second, that investor activism in relation to executive pay and rewards is on the rise with, among other changes, ESG targets in incentives becoming more common; and third, that 2023 could be a tough year for Remuneration Committees determining how to account for inflationary pressures affecting both employees and executives.

Nic Stratford, an Executive Reward Partner at Mercer commented, “The pandemic had a significant impact on Executive Director remuneration, with many directors taking voluntary salary reductions during the worst period of the pandemic and in many cases, their 2021 bonus and long-term incentives did not pay out.”

“As company performances improved into 2021, most salary reductions were unwound and bonus levels rebounded. Our analysis shows that bonus payouts made at 85 per cent of the maximum possible in FTSE 100 companies, are actually higher than they were pre-pandemic.

“We sense the reason for this is many companies set their financial targets in early 2021, at which point the success of the vaccination programme and the emergence of new variants could not be confidently predicted.  As such, many of the targets set may have been conservative, in hindsight.”

The Handbook points to the growing theme of investor activism as shareholders continue to pay close attention to pay decisions, with particular focus on alignment in companies’ treatment of executives to that of other stakeholders. Companies perceived to have treated executives more favourably than employees, or viewed to have ignored the wider context and experience of shareholders, have faced public censure and low AGM votes.

“The average percentage of votes in favour of FTSE 100 executive remuneration policies at AGMs increased from 86% in 2021 to 88% in 2022.  In the FTSE 250 the average increased from 88% to 93%. This does not necessarily mean that investor sentiment has become more positive though,” said Mr Stratford.   

“It is more likely to be an indicator that shareholders have won the recent big battles to force companies to make changes to their remuneration policies and that having made those changes, the remuneration policies being put to investor votes now generally satisfy investor red lines.”

Mr Stratford indicated that only three or more years ago, most companies paid their executives significantly higher pension contributions than were available to employees. More recently, companies have responded to investors demands for pension levels to be more aligned with the average of the workforce and 98% of companies now state that newly appointed executive directors will be offered pensions as the same level as the workforce.

“A similar percentage of companies have either already aligned existing directors’ pensions or have committed to do so by the end of 2022,” he said. “As a result of these changes, there is now only a 2% point difference in median pension levels for executive directors compared to the workforce average and this will have been almost completely eliminated by 2023.

“In addition, investors have signalled to companies that they need to pay more attention to ESG issues, leading to greater inclusion of ESG targets in incentives. Around two-thirds of the FTSE 100 executives now have ESG targets in their annual bonus and around half have them in their long-term incentive scorecard.”

More generally, Mr Stratford indicated 2023 would be a busy year for companies and their investors. UK listed companies are required to hold a vote on a new binding remuneration policy at least once every three years, with a majority of the FTSE required to hold their next vote in 2023. 

Mr Stratford believes that companies that held off making changes due to the pandemic may come forward with proposals for significant changes in 2023. Depending on the nature of these changes, directors’ remuneration votes may return as a key theme in the news.

“Remuneration Committees are also going to face other challenges in the next 18 months,” said Mr Stratford. “As inflation rises, the budgets for 2023 employee salary increases are also likely to rise. Whilst employee salary increases were running at around 2.5% to 3.0%, investors have been relaxed if executive directors receive salary increases at the same level. 

“If salary increase budgets reach 5.0% to 6.0%, or even more in 2023, it is not clear that investors will be just as relaxed for executive director salary increases to be at the same level as the workforce.

“In short, Remuneration Committees would be foolish to assume based on 2022, that 2023 will be straightforward.”

Marsh McLennan (NYSE: MMC) is the world’s leading professional services firm in the areas of risk, strategy and people. The Company’s 83,000 colleagues advise clients in 130 countries. With annual revenue of approximately $20 billion, Marsh McLennan helps clients navigate an increasingly dynamic and complex environment through four market-leading businesses. Marsh provides data-driven risk advisory services and insurance solutions to commercial and consumer clients. Guy Carpenter develops advanced risk, reinsurance and capital strategies that help clients grow profitably and pursue emerging opportunities. Mercer delivers advice and technology-driven solutions that help organizations redefine the world of work, reshape retirement and investment outcomes, and unlock health and well being for a changing workforce. Oliver Wyman serves as a critical strategic, economic and brand advisor to private sector and governmental clients. For more information, visit marshmclennan.com, follow us on LinkedIn and Twitter or subscribe to BRINK.