UK: FTSE 100 Companies Respond To New Disclosure Regulations And Voting Regime

• More than 75% of FTSE 100 amend remuneration arrangements;
• In over a quarter of performance share plans, the participants will not receive any shares for five years;
• A quarter of companies have increased the shareholding required by directors;
• A third of companies did not increase salaries for chief executive directors.

More than three quarters of FTSE 100 companies have made changes to their remuneration arrangements in the past 12 months, as companies respond to shareholder expectations and the Government's new rules on disclosure and voting. A new report from Deloitte on FTSE 100 directors' remuneration shows that companies are seeking to better align the interests of directors and shareholders by focusing more on the longer term, increasing the shareholding requirements for directors and introducing simpler remuneration structures.

Stephen Cahill, partner in the remuneration team at Deloitte, comments: "This year we have seen an unprecedented amount of change to remuneration structures, undoubtedly prompted by more dialogue between companies and their shareholders following the new requirements on disclosure and voting."

Long term incentive plans

35 companies have implemented new long term incentive plans in the past 12 months, more than at any time in the last ten years. Last year, almost half of FTSE 100 companies operated more than one long term plan, this has now fallen to less than 30%. The bonus share matching plan has been removed by 13 companies, demonstrating a move towards simpler arrangements.

Cahill adds: "A particularly striking finding from this year's analysis is that in over a quarter of the performance share plans the participants will not receive any shares for five years. Overall, almost half the long term plans in place are now based on time periods longer than three years."

Shareholder alignment

Shareholders expect directors to be required to hold a minimum number of shares. Almost all companies (96%) now have such guidelines in place.

Cahill comments: "There is an expectation that directors will hold sufficient shares to create real alignment with shareholders. In the past year we have seen over a quarter of companies increase the minimum requirements, resulting in a median requirement to hold shares with a value of 200% of salary, compared with 150% last year. In the largest companies this rises to 300% of salary."

New disclosure regulations and voting regime

The new disclosure regulations and voting regime came into effect in October 2013. Deloitte's analysis shows that most companies received a high level of support for both the remuneration policy and the annual remuneration report*. 79% of companies received more than 90% of votes in favour of the remuneration report, compared with 80% of companies last year.

Cahill adds: "Shareholders are taking a robust position where policies and practices are not considered to be in line with best practice."

Salary changes

Salary increases continue to be modest with a median increase of 2.5% and fewer companies have given directors increases in excess of 3% (16% this year compared with 25% last year).

Cahill says: "Companies are showing moderation with salaries, demonstrated by the fact that 35% of chief executive directors and 30% of other executive directors received no salary increase. Restraint has been particularly apparent in the top 30 companies where 44% of executive directors received no increase."

Incentive changes

There has been no change in the median potential bonus that may be paid in FTSE 100 companies generally but the median has decreased in the top 30 companies and actual bonus payout amounts continue to decrease. The median bonus payout across all FTSE 100 companies in 2013 was 70% of the maximum opportunity**, compared with 87% four years ago. In the top 30 companies payouts were lower with a median of 58% of the maximum opportunity. In 11 companies, compared with only 3 last year, the level of the bonus payout was reduced by the remuneration committee to better reflect the overall company performance.

There has been no change in the potential size of the median long term award. The vesting of awards*** relating to performance periods ending in 2013 has also been lower than the previous year with a median of 40% of the maximum that could have been earned.

Cahill concludes: "The variability of these plans is demonstrated by the fact that over a quarter of recipients received no payout award and only one in five received the full award.

"A key expectation of shareholders is that companies will be able to claw back incentive payments and share awards where they were clearly inappropriate. This is rapidly becoming normal and accepted practice and provisions allowing sums already paid to be recovered are now in place in over 40% of companies****."

Notes to editors

* Shareholders now have two opportunities to vote on directors' remuneration, a binding vote on the remuneration policy and an advisory vote on the annual remuneration report which provides details on how the policy has been implemented.

** There is a maximum bonus opportunity based on company performance. Depending on the extent to which the performance targets are met a proportion of the bonus will be paid, up the maximum for outstanding/exceptional performance.

*** Vesting of awards refers to the period of time before the recipient has the right to transfer shares and realise their value.

**** 'Real' clawback requires the recovery of bonuses already paid, or the value of shares already awarded and potentially sold by a participant. This is distinct from malus, which means that any award of shares which have not yet been released to an individual can be reduced in situations such as a misstatement of results or gross misconduct. These provisions are now in place in around 80% of companies.

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