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Article | Executive Pay Memo – UK

Executive compensation year-end wrap-up

Regulatory, corporate governance and investor developments in 2019

Executive Compensation

By Jessica Norton , Hazel Rees , Paul Townsend and Alex Little | December 2, 2019

Exploring 2019 executive pay developments in the UK and taking a look into the year ahead.

It’s been a busy run up to the end of 2019 as the most influential UK proxy advisors – the Investment Association (IA), Institutional Shareholder Services (ISS) and Glass Lewis (GL) – have now formally set out their latest positions on executive remuneration with potential areas of scrutiny ahead of the 2020 AGM season. Their annual guidance is considered the ‘benchmark’ for good practice alongside the UK Corporate Governance Code. They generally reflect the expectations of institutional shareholders and can therefore have a significant impact on AGM voting outcomes.

This article is a high-level overview of the key focus areas which have emerged from the guidance, plus insights from our ongoing direct engagement with institutional investors and trends in market practice.

Executive pensions

Executive pensions continue to be a hot topic as investors and companies respond to the 2018 UK Corporate Governance Code requirement for executive pensions to aligned with those of the wider workforce. There is a unified view that arrangements for newly appointed executive directors should be aligned with employees immediately and failure to do so will likely have a negative recommendation and voting impact. There is, however, a more pragmatic view when it comes to the alignment of incumbent executive directors with the wider workforce. ISS and GL have signposted their intention to take a more holistic view of remuneration arrangements compared with the IA who expect companies to put forward a ‘credible plan’ for alignment by 2022.

Willis Towers Watson Insight: Our analysis of FTSE 100 trends showed that companies have been responding to investor pressure on pensions, with around 40% of FTSE 100 companies making changes to executive pension arrangements in 2019. The majority of those making changes reduced levels for new hires and we expect this to continue in 2020 as many companies table a new policy for shareholder approval. We also anticipate that more companies will reduce levels for existing executives – or at least set out a ‘credible plan’ to do so. Our recent direct interactions with investors suggest there are divergent views but that many are pragmatic so it’s important each company understands the perspectives of its individual investors as some are focused on bringing down absolute quantum as well as wider workforce alignment.

Post-employment share ownership guidelines (SOG)

The IA, ISS and GL all view the introduction of post-employment SOGs as good practice. In particular, the IA expect the introduction of post-employment SOGs in any new remuneration policies and that they should extend to two years post-employment at the level of the company’s in-employment SOG (or the level held at the point of departure if lower). Further, GL expect that the grant of restricted shares is accompanied by significant shareholding requirements, including a post-employment SOG of at least two years.

Recent conversations with investors suggest that, while some are aligned with the IA guidance, others are comfortable with alternatives such as 50% of the shares being released after one year.

Willis Towers Watson insight: Investors have long encouraged meaningful SOGs and the concept of extending this post-employment is receiving similar levels of support. Our analysis of FTSE 100 trends showed that the median CEO SOG in the FTSE 100 is 300% of salary (unchanged from 2018) and that 30% of FTSE 100 companies now operate post-employment SOGs. Of these, 40% of are compliant with the IA’s preference for the lower of the SOG immediately prior to departure or the actual shareholding for at least two years. Recent conversations with investors suggest that, while some are aligned with the IA guidance, others are comfortable with alternatives such as 50% of the shares being released after one year.

Remuneration levels and pay for performance

No surprises that, notwithstanding the noise around pensions, focus in 2020 will remain on increases in quantum, from base salary increases to incentive opportunity. GL expect proposed salary increases to be justified and appropriate compared to those of the wider workforce, while the IA will continue to look closely at how any increases to basic salary or variable pay opportunity are justified. ISS will continue to apply the European Pay for Performance model, while paying attention to a number of areas, including well-explained and non-excessive fixed or variable pay increases.

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Willis Towers Watson insights: In our conversations with investors they have expressed concern at the disparity between executive pay outcomes and returns to shareholders and they expect remuneration committees to apply good judgement when it comes to base salary increases and formulaic outcomes for incentives. Investors, supported by new disclosure requirements, will be looking more closely at the use (or not as the case may be) of discretion where formulaic outcomes are not considered aligned with underlying business performance and the shareholder experience. Such is the strength of view, that companies could receive a vote against a remuneration report where remuneration is considered excessive, not aligned with the wider workforce, and/or is not accompanied with robust rationale.


The IA expect greater transparency on financial, strategic and personal targets so that the link between pay and performance can be clearly seen, and that strategic and personal targets and outcomes are disclosed separately to financials. ISS continue to view full bonus target disclosure as standard market practice but, where remuneration committees find this difficult for reasons of commercial sensitivity, ISS expect the rationale for this decision to be explained with a commitment to disclose once such sensitivities dissipate. ISS now also expect committees to explain how they have taken into account any relevant Environmental, Social, and Governance (ESG) matters when determining remuneration outcomes.

Willis Towers Watson insights: ISS have expanded their view in relation to disclosure of the use of ESG metrics, as noted above, but the IA’s principles – which do encourage the use of ESG metrics – have remained largely unchanged in their updated guidance. For both, the focus seems to be more retrospective than prospective – i.e. encouraging remuneration committees to apply downwards discretion where there has been a negative ESG event rather than necessarily pushing for companies to apply particular ESG performance conditions to incentive arrangements.

Other noteworthy developments

Further changes to 2020 proxy guidelines are largely editorial although we have seen some additional wording and ‘hardened’ views from both proxy advisors and investors in respect of:

  1. 01

    ESG measures

    The link between ESG measures and incentives has been a consistent theme in recent conversations with investors as we see developing pressures on FTSE companies to gear up focus in this area. While some investors support introduction of ESG measures (if appropriate to the business and accurately measured), others show greater reluctance and don’t think such measures should be incentivised due to the difficulty of setting targets.

  2. 02

    Exit payments

    A harder view from ISS that formal notice is served no later than the day on which a departing executive’s leaving date is announced, otherwise a clear explanation should be given. In addition, any outstanding long-term incentive (LTI) awards should be pro-rated by reference to time served as a director rather than a later date if they transition from an executive to a non-executive role.

  3. 03

    Alternative remuneration structures

    IA members are increasingly of the view that LTI plans are not working effectively and can drive outcomes which can cause concerns for shareholders. There is a growing body of investors willing to consider alternative remuneration structures, if there are clear strategic benefits. This view, although not new, has been reiterated in the IA’s latest principles to reignite the discussion.

Regulatory and governance developments

2019 has been a relatively quiet year in terms of new developments, as the focus has been on responding to the 2018 UK Corporate Governance Code. However, regulation formally coming into force will influence reporting in 2020, including the revised Director’s Remuneration Report regulations which require companies to report on the potential impact of share price growth on policy scenarios and vested LTIs and to report their CEO to worker pay ratio information. Further, the Shareholder Rights Directive (for policies adopted from, and financial years commencing after 10 June 2019) include changes on the reporting of the Single Figure Table and broadening of the disclosure for year on year CEO (and executive) pay changes along with minor changes to policy disclosures.

There are undeniably increasing pressures to adapt and respond proactively to policy updates, as seen through developing investor views and recent high-profile cases, such as the BEIS committee inquiry into Thomas Cook, which has a partial, yet noteworthy, focus on the area of executive remuneration with recommendations that align with many of the critical themes that have emerged so far this year. The BEIS committee inquiry called for executive pension changes to create a fairer system, bonus scheme arrangements with pre-defined and non-ambiguous measures as well as the strengthening and extension of scope of clawback provisions. The General Election may influence government interest in executive compensation in 2020 as the main political parties’ manifestos detail views with both executive and broader compensation implications.

The 2020 AGM season is shaping up to be a pivotal one for many FTSE companies who will need to navigate several challenges. Willis Towers Watson’s executive compensation practice is here to aid companies on this journey.


Senior Director, GB Executive Compensation Practice Leader

Hazel Rees
Senior Director, GB Rewards Business Leader

Paul Townsend
Senior Director - Regulation, Corporate Governance and Investor team lead

Director, Executive Compensation (Dublin)