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Remuneration reporting workshop, 14 October 2020

This workshop covered the latest developments in Remuneration Reporting.

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Against a backdrop of companies’ responses to COVID-19 and a continued focus on fairness, good disclosure remains critically important to ensuring the background to and rationale for executive remuneration is understood. This workshop will be led by PwC experts and will explore how companies can use their Directors’ Remuneration Report (‘DRR’) to explain and justify the remuneration of executive directors in the context of corporate performance, longer-term company strategy and pay arrangements for the wider workforce.

We are delighted to be joined by external panellists who will provide their insights and learning on how they have refreshed their directors’ remuneration disclosure and introduced a broader perspective into their company’s DRR. We will also share key findings from our own research, which has a particular focus on how well companies responded to the new disclosure requirements under Provision 41 of the 2018 UK Corporate Governance Code. As well as this, we’ll also look ahead and consider what companies should be thinking about from a disclosure perspective as they begin to draft this year’s DRR.

The workshop will also give participants the chance to share their thoughts and challenges with other like-minded professionals.

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Marcus Peaker

Good morning everyone, thank you for joining us on remuneration reporting workshop, looking at the little total on the top of my screen, we have got most of the people that we were expecting. I have been given strict instruction to start on the dot 9 o’clock. Today, what we are really focusing on is the actual reporting of remuneration, how do you set it out in your reporting account, how do you get your key messages across, and looking at examples of companies that have done this very well. This is part of obviously our building public trust program, due to COVID obviously we are not having the physical seminars and the awards that we’ve done in previous years, but we are trying to obviously keep at forefront of people’s minds this focus on good reporting, which I think frankly over the next financial year, when the remuneration committee report is written in respect of it will be pretty critical. There will be a lot of explanation required if companies are going to be doing anything in the remuneration world at the moment. I have been asked to remind you all that the session is recorded.

Just to introduce myself, I am Marcus Peaker, I head up the executive compensation skills group of PwC in the UK. I spend the vast majority of my time, advising FTSE 350 companies around executive remuneration, and the other bit of my time is working with companies around IPOs, who are obviously transitioning from private to public company. It doesn't matter how much you tell them about the reporting requirements, the regulations that apply, and how much information will be disclosed about them once they are listed executives in pre-IPO companies, always seem slightly shocked at that first annual meeting, where they do see what is actually required under the regulations, and what needs to be disclosed. So that's me. Caroline, if you want, quickly introduce yourself.

Caroline Alhadeff

Thanks Marcus. Hi everyone, yes my name is Caroline Alhadeff. I work in the executive compensation practice, alongside Marcus and have a particular focus on remuneration reporting. I am one of those weird people that would actually say remuneration reporting will be my specialist topic if I ever ended up on Mastermind, so yeah keen to share with you some of our thoughts today on what we found this year and what to think about as we head into next year.

Marcus

Great, thank you, Caroline. We are looking at, if we look at the timetable, we’ve got welcome and introductory remarks, which apparently, I’ve got one-minute left from, then findings of our review of directors’ remuneration reports. We have got, thankfully, a panel of people who have actually had to contribute and work towards making these reports happen within their own organisation. So, there’s a panel speakers and question session, there’s a looking ahead to 2020-2021 and that's more about obviously reporting and how one might better report, as opposed to getting into the policy and discussions around what do we think company should do around bonuses, incentives, pay, and all of those things. We run a compensation network events, the next one is next Thursday where you are all welcome to join it, and that is where we tend to provide that kind of information market practice, what other companies are doing around some of these key issues.

So, I know Caroline can give anyone details of that if they would like to join. Then obviously questions, wrap up time. We will obviously keep to time, so hopefully that will cover everything that people are looking forward from this session. So, with no more delay, I will hand over to Caroline.

Caroline

Thanks very much Marcus and welcome again everyone, really pleased to see so many of you join today. We will touch on this lots throughout the session, but this year, more than ever, reporting is really going to be critical. One thing we’d like to do before we get started is just to make sure that the technology we are making use of today is working, something I know I’ve struggled with over the past seven months. With that in mind, we are going to be using Slido, just to try and get some quick reactions from you on a couple of topics.

This is our first question, so hopefully a relatively simple question to get things started with. If you could please head to Slido, either by scanning the QR code at the bottom right of your screen or by going to Slido.com and putting in RemunerationReporting as the event code, it needs to be the two capital ‘R’ and then all one word, we will get an instant reaction as to what companies are thinking to do, what you are thinking of doing in terms of making any changes this year.

It looks like there is a clear indication that companies are thinking of making significant changes. The majority view there is to better explain the backdrop of the decisions made against COVID-19, that looks like the clear winner there at the moment. Obviously, some scores still coming through, but yeah absolutely as I’ve said reporting this year against the backdrop of COVID-19 is going to be really critical to making sure that those decisions are understood. So, I can't say I am entirely surprised by the answer, but great to see that people are already starting to think about that as we head into the drafting season.

So as Marcus just said a quick overview of the agenda. We are going to look back effectively for the first 10 minutes, what we found from our benchmarking this year, and then I’m really pleased to say that we are being joined by Jules Ingleby from Schroders and Nicole Westcott and Liz Rogers from Severn Trent to share some insight on some of the innovative disclosures they included in their last DRR. Then we are going to look ahead and try and pick up exactly on what companies could be doing, in particular, against COVID-19, but also the UK corporate governance code.

So to get into that first agenda item, this slide provides an overview of our criteria this year and broadly buckets the areas we look for when scoring the reports for companies in FTSE 350, excluding investment trusts, for financial years beginning during the 1 April 2019 and 31 March 2020. For those of you, who have not attended one day sessions before for the past 18 years, PwC or we have been reviewing the directors’ remuneration reports for FTSE 350 during these years as part of our Building Public Trust programme.

It goes without saying that executive pay remains in the spotlight and is a key area that is often commented on as around often for disclosure on executive pay as we do build that transparent and candid disclosure, it is critical to building trust on this particular topic. Through our benchmarking, we look to connect with companies for disclosures that are innovative and go beyond what is required from a purely regulatory perspective.

In terms of what we found this year, you will see that the overall median scores for the FTSE 100 and the FTSE 250 were broadly similar. Looking at 46% for FTSE 100 and 39% for FTSE 250, some variation in the highest scores, but those do tend to vary year on year. The chart on the right then actually shows the breakdown of scores against those buckets that was on the previous slide. You’ll see there is quite a spread in terms of the median score across those buckets, with the areas that is generally scored less well in being the response to 2018 code. Link to strategy, and wider context and appropriateness of pay which are all, and in no doubt, areas that are going to be even more important this year, as we look to report against the backdrop of the pandemic.

Diving into some of the areas in more detail. This slide looks at how well companies scored against our criteria, when we had incentive outcomes and alignment with shareholders. Starting with incentive outcomes, so we looked at both annual bonus and long-term incentive disclosure. In terms of the annual bonus, you will see that the median score was 66%, but that was skewed towards companies picked up more scores in relation to their disclosure against their financial measures as opposed to their non-financial measures. It is worth saying that actually in terms of our criteria this year, the annual bonus and the outset disclosures, our starting point was to look at companies who were disclosing well against the regulatory requirements. That is something that we’ve seen companies have been not particularly good at, has been picked up by investors over the last few years. Then we also looked at how companies are taking this further. So, in respect to the annual bonus, we looked at was there a clear reconciliation to this single figure. So, could you work through the outcomes, and get to the number that was provided in single title figure.

On the outset, disclosure median score was 33%, which reflects back, most companies, in fact I would say the vast majority of companies disclosed against the regulatory requirement as well. They are setting out what the targets were and what the actual performance was. What we then looked for was taking that one step further, while companies are breaking down that value that was in the single figure table. So, were they were showing what was the value of dividend equivalents awarded, what was the total value as a result of share price appreciation? That 33% really represents most companies ticking that box from a regulatory perspective, and not moving that disclosure further forward.

On alignment with shareholder’s perspective, you will see very few companies, only 3% of the ones we looked at included, and the impact of share price movement on director shareholding. What I mean by that is, we looked for a table or a chart that showed, if there was a theoretical or a real movement in the share price, what kind of value loss or what does that mean from a value loss or gain to the executive directors on their shareholding. A larger proportion of companies do explain, however, what counts towards the shareholder requirement which we do feel is important.

In terms of the response to the 2018 corporate governance code, so what we are really looking at here was how well companies were reporting against the disclosure provisions in provision 41 code. Of course, for most companies this was the first year where this was needed from a comply or explain basis. You will see again, there is variation and which ones companies have tended to score better in versus our business. The ones where we found companies were picking up marks in that orange and dark red, for things like explaining any exercise discretion. Perhaps not unsurprising given that also became a regulatory requirement this year, but also engagement with shareholders. Again, something that companies have typically tended to include, and actually, a lot of companies went through policy review this year, where we often find that disclosure being incorporated and also appropriateness pay using internal measures. The CEO pay ratio was required from this year, and that is obviously one way of explaining the appropriateness of pay using an internal measure. Companies got less while on the other three areas, so what engagement took place with employees to explain the alignment of pay, appropriate as the pay is from an external perspective. And actually, when we come on to our panel session today, George would be able to share his insights on what they have done in their Schroders report on that topic and then its explanation the policy of Brexit as intended was where companies generally scores the least well. So lots of variation there, I completely recognise that was the first day of reporting or unable to comply with this provision, obviously it is always going to be a bit of an evolution and not that practice would clearly always develop. But we will pick up later on, and what companies could be doing to bring that disclosure forward.

And finally, the wider scene, so clearly really important, and linked to some of the other provisions that were in the code around kind of explaining all of those, through shining a light on all those stakeholders that are involved within the business and fairness angle that has become so important in recent years. You will see there that we found that the very vast majority of companies disclosed pension contribution rates for both incumbent and new executive directors and employees, which is very much in line with investor guidance and most of you would be familiar included in the IA principles last year. Roughly half included some disclosure around explaining the similarities between executive director and employee pay. What we tend to look for there, and is some form of cascade, perhaps many policy tables that shows what is the remuneration policy for employees, and you can start to draw those similarities. And only 20% included some explanation of the expanded remit of the remuneration committee. A lot of companies include some form of statement, which says that the remuneration committee remit has been expanded, but very few companies actually take that further, and help the reader to understand what additional information does that mean for the remuneration committee received, and what impact has that then had on the decisions made by a remuneration committee.

So, that is a bit of whistle-stop tour of what we found from our results this year. So important to share, but also recognise that that was obviously in respect of last year’s reports, and the world does look incredibly different, when these were put together. But it is a reflection as to where we are starting from as we head into drafting this year’s report. Before I introduce the panel again, I would just be interested to hear your views on this particular question.

So how important, on a scale of 1 to 10, do you think the employee contacts is the reporting of directors’ pay? If you could have to Slido again, it would be great to get your views on this.

So, it looks like the average score is currently around 7.9, so the most popular response is an 8 out of 10. Looks like that's where we are settling on.

Marcus

Yeah and Caroline, I would probably if it were it me, I would probably give it about a 10 out of 10, because I think that in the current climate, committees are going to have to look at the other stakeholder experience. So, employees, customers and suppliers to give context to the remuneration decisions. I think that shareholders are going to be looking at it in the round as opposed to specifically around, perhaps the narrower focus in the past. So, I think that if employees have been treated well, and directors are being treated consistently, that is going to be a lot easier to get shareholder support.

Caroline

Well actually, it is almost as if attendees knew what we were going to come on to next in our panel session, so that’s been a great segue actually for me, it's the panel. So, as I said, I am really pleased to say that we’ve been joined by Nic and Liz from Severn Trent and Jules from Schroders. If you want, you want to take yourself off mute, which I appreciate can be a bit of a challenge. I want to just head straight into our session.

The purpose of this for everyone else was, Schroders and Severn Trent have been two companies that consistently scored in our top 10 as we’ve done the benchmarking I talked to over the last few years, and certainly this year included a number of innovative disclosures, in our view, that really went beyond that regulatory requirement. So I’m going to kick off with you, Nic from Severn Trent, and just wanted to see if you could just explain to everyone, you have got this fantastic company remuneration of thoughts that fits within your DRR. It would be great if you could just share your reasons for including this, whether you experienced any challenges, and any learnings you feel you have fed it into your DRR.

Nicole Wescott

Okay, thanks Caroline. So, this year we took a bit of a different approach, and we designed the report with two distinct areas. We looked at the executive lens, but then we looked at our company-wide remuneration and we actually separated these within the report, but we made sure there was strong linkage between the messages in both sections. We do pride ourselves in a transparent approach to how we report company-wide pay, and our reward framework. The section was designed to take us to the next level by detailing more about pay and its alignment across the business. To take a moment to talk about current committee focus. The committee looked at what it contributes in process over the past 12 months, and we added another layer to some previous disclosures. Though, for example, on our pay ratios we did, two years reporting, and we did some different how the component parts played out.

We also looked to summarise the areas that the committee we are going to be looking at the forthcoming 12 months and we were going through a period of time when we were embedding our purpose and values, and we included employee colleague feedback, pay-related initiatives, as well as indicating in some of the components and parts of our policy review that is coming up this year.

On the wider employee engagement, we thought we would spend a lot of time and effort through the year bringing the Board in its entirety closer to the frontline operations in our trade unions. We developed a company forum that meets four times a year that has members of the Board, the Executive team, the Senior Management team, trade unions and employee representatives as well. Within that forum, we were engaging employees on all ways of working. And actually, this year what we’ve done, took the opportunity to walk them through our executive remuneration, and show us the alignment with the requirements of the code, but more broader than that, how remuneration linked to our wider policies in practice. We gave that form of snapshot of the code requirements and it went down well, and we’ve now got it as an annual standing item on that forum agenda. As you can imagine, it always creates some debate when you’ve got trade unions in the room, especially on the CEO pay ratios, but they are all part of our pay negotiations every year anyway. This is an area that I know most companies are engaging on and talking about it, but not necessarily highlighting it in that annual report, and we have had good feedback from that perspective.

On our people section, it’s a new section, and it was the first section we came to in our strategic report, and it showcased our boarder HR and people initiatives – so the activities and our accomplishments - but we connected these to the areas of diversity, inclusion, culture engagement, and a big push on social mobility. In all those aspects we put a reward lens on it as well. We brought to life our new purpose and values, and we showcased that to some of our employees from our interns and apprenticeships, have been able to thrive, and the combination of how they bring their whole self into the workplace. And we’ve looked at that through the lens of gender mapping, and fairness in pay, as well as diversity in acquisition.

We did feel it was really important to develop a standalone section, because although it’s about our brilliant workforce, and our colleagues don't have direct link to a DRR, but it didn’t necessarily fit within our DRR, it wasn’t isolated to remuneration. And the Rem committee probably I would say we are a little bit nervous of Trent, because they like to have this report that can be pulled out of the AR separately. Actually, what it did was it encouraged investors and analysts to look broader into our annual report and accounts, and we had some fantastic feedback on that.

The other thing we did in our report this year, we were a little bit ahead of ourselves with COVID-19. As a water company, it is the one thing that people couldn't do without through this pandemic, whether it be locked in their houses, or needing to wash that hands and just keep that hygiene to the optimal level, and having water was really important. So, we very quickly, early on in March, made some very significant announcements. We based this on providing support and stability of pay and income for our entire workforce, many of whom are classed as key workers. We did that for all key components of executive remuneration as well for short-term and long-term incentives. For example, we made sure the 2019-2020 annual bonus was paid. We assured pay rises for three years in conjunction with our trade unions. We looked at how we would run our incentive programmes for the forthcoming new year in terms of bonus. We are able to put all that to colleagues early on during the pandemic. We had some really, really great dialogue with the committee about the impacts of COVID-19, and the steps that we were taking. And it’s paid off really well for us because the workforce has both been grateful and on board for stability. Many of which live in homes where another contributor in the house was either furloughed or made redundant. Certainty of pay, was really important and that was something we were able to create through remuneration. That's it for me, I am happy to take any questions when you are opening it up Caroline.



Caroline

Thanks Nic, really great, if anyone is looking for some really great examples of how to bring that employee context into the report, really recommend taking a look at Severn Trent forum. Hopefully, this slide in particular, this table really clearly articulates what was the decision and then what was the rationale, which I think is going to be so, so important as we report on those decisions. Hopefully it gives a good flavour for some of us on the line as to what you might want to think about the next year’s report.

Marcus

I just think it was a very quick observation, because obviously, we can't blow our own trumpet too much, but what was quite interesting was that when the questions were asked, all of these things were being done by the organisation anyway; the engagement with employees, the forums, the all-employee bonus all of those things. It was more that the company didn't really emphasise it in the external communication, and I suspect that's a thing that a lot of organisations will find. That actually they are probably doing a lot of what they should be reporting on, it’s just not being brought to the attention of the committee and being put into the report itself.

Caroline

Absolutely, thanks Marcus. Jules over to you on the Schroders report. So, you, have included for couple of years now, some information by charts and the graph that I will show on the next slide that really speaks about the appropriateness of pay, and in particular looking at external measures. Do you want to again just share some insights on why you chose to include them as some of the challenges you’ve experienced?

Jules Ingleby

Yep certainly, and thanks for inviting me to speak. I was just scribbling down that I will study Nic’s COVID explanations more closely, and you will be seeing something very similar to that table appearing in next year’s report account, I am certain.

On this chart, the requirements disclose the CEO pay history table, and the TSR charts, sits next to each other in the disclosure rules. I know, Rod has always said to me, when we first disclosed, we disclosed them separately, just following the narrative that we had in our pre-2013 remuneration report. And Rod has always suggested an improvement over time would be to position them more closely, and eventually I listened. And so, when you put the table below the TSR chart, to me showing the CEO pay on the same chart graphically is just a really logical place to go.

Surely, the intention of the disclosure rules was to aid a comparison, and this seems like the logical way of doing that, having on the same chart. We slightly complicated things by having a change of CEO in 2016, but we found a way to address that. As so as a mathematician, to me this just feels like an obvious way to go.

Caroline

Yeah, I would absolutely agree.

Jules

Particularly, while the TSR chart looks favourable compared to the movement in pay.

Caroline

Yeah, I think that's true. We would certainly recommend that perhaps if TSR is not a KPI that does tell the story you want to say and isn’t perhaps not the most relevant KPI for you as a business, could you do this. Obviously, you don’t have to include the 10-year TSR chart from a regulation perspective, but could you include an additional chart that say, plotted the total remuneration against another KPI, so profit or some other measures. I think there are, and I agree that it might not work best for everyone to show it against TSR, and you need to always, again trying to limit duplication, it is great to be able to include this and also align with the regulatory requirements, but there are other ways of showing that TSR is not the best KPI for you.

Jules

Then this really in the disclosure in the charts on the right that we worked on here, so this is more around the appropriateness of pay using external measures. So, some might feel our absolute pay levels are relatively high versus FTSE100 norms, but on the other hand, our competitive positioning versus the firm's we compete with for talent is much more in line with what an external observer might expect. And we wanted to include something to demonstrate this, but then the challenge is our asset management comparative group, lots of those firms aren't listed. We used proprietary survey data from a survey firm for those comparisons, and the terms of our survey participation prohibit any of the survey participants publishing the data or publishing the names of the comparators. Not so for the FTSE 100, and FTSE100 FS data we use, which is collated for us from public data by PwC, but the asset management data we show is proprietary data of another firm. And so, we developed this kind of way of displaying our competitive position as a compromise that we agreed with our survey provider, or that they were willing to agree, that allows us to provide that context on how we stack up against the market. Particularly you can see for the CEO there, he is a little bit below the median for salary in total comp, even though he is pretty toppy compared to, say, the FTSE 100 financial services benchmark. And that was the intention there to really give the context, is quite key. Then the text explained some of the general approach, and then the commentary by role provides other useful concepts, so particularly there on the CFO. Our CFO’s role is a lot broader than some with oversight of operations, HR com, risk management, blah blah. And therefore, yes, his competitive positioning looks higher, but actually, again we can provide that context.

And I suppose the challenges we have here. If you look at, say, Glass Lewis or IRS payment performance type methodologies, I would love to be able to disclose the constituents of my asset management peer group, because those firms seem to just put us in a diversified or other financial services buckets, so we are being compared against London Stock Exchange, Deutsche Boerse. Yes, they are listed companies, but they don't really share any characteristics with us and so the paper performance outcome tends to be a bit of a lottery, that's probably my lasting frustration but not one, I will overcome with the climate.


Caroline

Yeah, and then finally, just wanted to touch on your link to strategy diagram, which I know again, it is something that we’ve provided feedback in the past about being a particular area that you could improve upon and there has perhaps been some resistance, I think, when we spoke before, but just wonder if you could just touch on that for everyone else’s benefit.

Jules

Yeah, as Roz knows, the tradition approach is I invite feedback on our remuneration at the beginning of the process. We reject all of the feedback in a bit of a strop, and then over the course of the year or for few of these things over the course of a number of years get my head round the fact that this is supposed to be helpful input not criticism. Eventually I listened to Roz’s encouragement to do more on our link to strategy. That said, I think this is just a starting point. What we’ve done here, we have three strategic pillars that we talk about throughout the strategic report in the wider annual report and accounts. So those three icons at the bottom of the table are linking through to our description of our strategy. Then, effectively what we’ve tried to do in this table is show how our annual bonus scorecard measures feed through to those strategic goals. There is actually another table not shown on this slide, doing the same parallel to it. As I said, it is a starting point and there is lots of room for improvement, and I’d like to move it further.

One of the challenges for me is that all three of those strategic limbs could drive a positive outcome in most, if not all, of those metrics. When we first did it, I sat and had a head scratch, and I ended up with a table that showed all three icons for all four metrics, which seemed fairly uninformative and rather boring. So, what we then tried to do, was narrow it down to the most relevant, and something like that I can imagine internal stakeholders having strong views and are making difficult, but actually absolutely everyone got with that intention pretty quickly. Then the rationale for inclusion, the wordy bit in the table, just to try and provide a little more insight. But I am pleased that you picked this out as something you liked, because we really want to improve in this area, but I do think this is much more of a starting point. And I am going to look through some of your examples of what’s good and try and find some better ideas to nick, sorry borrow.

Marcus

If you do lots of research, Jules, it is called research, isn’t it, I think if you only do one it’s called plagiarism. I think what I would say there is, most of the investors, when you talk to them really, value this. I think one level, often the criticism you get when you try to put these things together, is one, it is a bit mickey mouse, because the strategy is broad and complex, and can you distil it. But if you look at it, all you are trying to do is track through what is the company's strategy, so how does the company measure success in our strategy, and then how is that reflected in the remuneration, performance conditions and outcomes. It doesn't have to be hugely complicated, but what investors are looking for is that line through.

One has to remember that the most looked at part of the report accounts for investors is a remuneration committee report, and in a way, you want all the information that you feel is relevant to their determination to be in that space. Yes you have a strategy report, yes you’ve got all of the front end, but actually a way of just encapsulating that sort of front to back in a table, has a disproportionate value to what sometimes the criticism is, while it’s a fairly helicopter view of what we do. But that's exactly what it needs to be, because all you are doing is demonstrating that there is a consistency of thought behind where your remuneration sits in the implementation of the strategy. I always think these ones are probably one of the more informative disclosures when companies put them in. I always tend to ask clients to put that right up front, near the Chairman's statement, because it is a good scene setter for the whole of the rest of the report. You do sometimes get resistance and you do get oh you know, we just saying this somewhere else, but I think as we could all see the purpose here is to show the link through as opposed to describe the strategy in five words.

Jules

Yeah, actually we put this in our Chairman's statement so in complete agreement.

Marcus

Yeah.

Caroline

Thanks very much Jules and Nic really appreciate you sharing your insights there, and I hope to see whether it's borrowed or researched as Marcus says, and other companies perhaps using your examples to take it forward. Obviously, much like, I would never advocate boilerplate disclosure. Again, with borrowing ideas, absolutely they can be taken unused but always needed to bring it back to how exactly it works for you and your organisation.

Conscious of time, so then what we are going to do actually, having gone, showing from those snapshots, just going to go to this slide. This final Slido question for today, which off the back of what we’ve just seen from both Schroders and Severn Trent. Want to know, are you planning to include any of the following (that will be clear when you head to Slido to explain) the appropriateness of executive director pay.

Interestingly, obviously only kind of 20 or so people have so far done the poll, but it does look like the leading answer actually is just limiting it to narrative in the Chair’s statement, which I think we will come on to how the Chair’s statement, it is a critical part of the DRR, but I would certainly encourage thinking about some of those additional disclosures that we have just seen and are listed here to really illustrate, and depict, and set those decisions against information and really tries to draw out that appropriateness.

Marcus, I don't know if you have got anything, any reflections on this initial poll?

Marcus

I think that, well actually if we go back to Jules’ is extracts. I mean clearly the appropriateness of executive pays in internal and in external context, then those bar charts which show the external comparison are important, and I think that are relevant when you're looking at the single figure bit. So, I would probably say that it is a message that needs to be underlying the whole report as opposed to it being one specific comment in the Chair’s statement. When you are looking at anything, whether it is bonus disclosure, changes to the package, exercises of discretion, things that you might have done in relation to COVID-19. I still think it’s important that you are looking at that appropriateness and building that, and even if it is not articulated into how you disclose.

You know, I think that the demonstration of renumeration against the KPI is actually quite helpful. What I would say is that once you’ve done it, you sort of have to stick with it. You know you can’t sort of say go damn, if I am looking at TSR and it’s going the wrong way, I don't want to show pay against that. It is helpful, but again it probably is best seen in the context of without. I might add that I know I don't advise Jules’ company, so I am not in any sense praising my own work, but I do think that the link to the implementation strategy and therefore the KPI’s, I think that then this does work. If you then say here our KPIs and if you track our KPIs against renumeration, it’s pretty effective. I think it’s all about, all of these elements are actually important in overall message, I don’t think you can limit them and say, well I'm just going to do one of them I think they are a combined picture.

Caroline

Yeah, I would agree.

So, moving on to our final session for today which is again looking ahead to what might we want to be thinking about as we start to draft 2020-2021 report. You know, we’ve said it before but I will say it again, clearly disclosure will be even more important this year as investors and other stakeholders scrutinise the decisions made by remuneration committees, particularly in light of the ongoing impacts of the COVID-19 pandemic.

We are going to first start with, what might you be thinking about in terms of reporting against the backdrop of COVID-19. Context will be absolutely critical this year, I think whilst we can say broadly bucket companies into ones that are perhaps only be in fact not been particularly affected and it impacts their business a pretty been as a result market movements versus companies that have been severely impacted as a result of national lock downs and local lockdown, etc. The experience of every company and the decisions made will have been unique, and I think that's what we really need to draw out in directors’ remuneration for this year.

Some of you will have seen that actually so LGM been the first major institutional investor to release their guidance, as we head into the 2021 and AGM season. They did clearly state in these principles that they expect remuneration committees within the DRR to explain how they’ve taken into account the impact of the pandemic on both its operations and its stakeholders when deciding pay outcomes. So I think it’s absolutely clear that that’s the theme that’s going to start coming through from the investor guidance we’ve seen throughout the autumn, so setting that scene so to speak, as to what has been the experience of all stakeholders will be really critical and I think a great place to start and is the remuneration Chair’s statement. If you take a step back, from a regulatory perspective, actually it is one of the few areas in the regulations that’s not particularly descriptive. The regulator requirement really suggests that broad principles around once insurance companies speak out the major decisions, the substantial changes and decided in respect of director pay in the year, I am providing that context.

It sets the foundations nicely for companies who want to be thinking about this year. In our view, we feel the Chair’s statement should describe the impact on the business and providing perhaps some insight into how the business is performing through the pandemic. Then what impact the pandemic had on its operations, how employees have been affected. So I think a key thing here would be around whether any self-redundancies have had to happen as a result of COVID-19. And then how have your shareholders have been impacted, and you have to utilise shareholder support, they would use the dividend or cancelling the dividends. Then the key one again will be around government report. Things like how you access the furlough scheme, you know quantifying what kind of support you have received from the Government will be key, just to provide that contextual positioning. Then against that backdrop, it will be to shine a light and provide a window into those really great discussions that happen in remuneration committees and explain why the decisions that have been made have been considered appropriate. So if you think back to Nic’s table for Severn Trent, it is about walking the readers through each of those key areas that have really been impacted from a pay perspective as a result of the pandemic - the salary incentive outcomes, incentive grants for the coming year. And sort of clearly setting out what was the decision and why was that decision made, and I think that will be really critical and for this year’s report.

Picking up on incentives specifically, clearly an area that is going to be under increased scrutiny from investors this year, that has always been the case, but I think even more so this year. Again, bringing back to the LGM’s 20-20 principles, their view is that for organisations that have had to utilise Government or shareholders’ support and make staff redundancies, their starting point would be that no bonus should be paid. The overview will be reviewed on a case by case scenario, and I think that is where the importance of exposure really comes in here. Because where you get to without your decision that needs to be really set out clearly in the report to bring the reader along as to why it is felt that was the appropriate decision. So, I think in respect of outcome, the way I think about it is the age-old teacher rule around show your workings. So, from speaking to some of the other investors recently, they’ve referred to this additional layer of disclosure is being needed this year. So, what they mean by that is that there is absolutely the regulatory requirements to show your performance, to set out your performance target and the performance achieved but take that a step further. So, once you walk the reader through, and in particular, explain things like any adjustments to performance targets and what were they originally, and what adjustments have been made, and why did you decide to make those adjustments, showing that then in that context that you have had in the Chair’s statement will be really important. Showing them, finding a way to show that side by side what was the outcome, what decisions did you have to make to get to that outcome, and then how did RemCo feel comfortable that was the appropriate final decision.

Marcus

This is obviously a joint conversation that I have had recently with a lot of RemCo clients. In terms of how to build that basis of what you are going to report, the five or so key questions that committees need to go through systematically, particularly around bonus, which is the real hot topic for 2020. I think shareholders are actually much more relaxed about LTIP grants, and LTIP vestings as long as there’s no adjustment. But as Caroline was saying, firstly, what were the targets, and did you actually apply them, or did you actually have to exercise discretion? If you exercise discretion, you need to be very careful, because the presumption from shareholders is that if it is positive, then they will vote against. The second layer is, well what’s happened to the shareholder experience over the period? So yes, everyone’s share price might have gone down, but has your share price gone down more than your peers, and is there a reason for that, so that is important.

Then the dividend experience. So, it's quite clear that investors like M&G will vote against any reports from remuneration, where bonuses haven’t been adjusted to take into account either dividends that weren't paid in respect to last financial year or no dividends this year.

Then you are into your fourth bit, which is, what Government assistance has the company had. There are obviously specific remuneration requirements in some of the Government's assistance, but COVID-19 job retention scheme money, how has the company dealt with that, has it repaid it, has it not repaid it. Again, there is a default assumption that, if you are taking government assistance, that would be reflected in executive pay outcomes.

Probably the last one, which is the most difficult, because even if you are successful what is the social context. So, what’s your customers, the society that you operate going to take a view on in relation to that bonus. If your absolute performance is lower than previous years, should there be a bonus that is higher than last year's. And also, if you are in an industry which the public sees as more infrastructure, part of the social fabric, then is it appropriate to pay maximum bonuses or bonuses at a certain level even if you deliver the performance.

So I’m sure Nic won’t mind me saying because it’s in the public domain, but Severn Trent took the view that as a water company providing an essential service, that while they set the targets for the bonus in the normal way with threshold target at maximum, that they would cap bonus pay-outs irrespective of performance to target on the basis that actually they didn't feel that it was appropriate given their customers and stakeholders pay more than target for this year. I have got other companies in the food retail business, who again are saying, ‘well, yes we have had this increase in turnover, but how much of is it down to management activity, how much is it down to just the general circumstance, how should we reflect that in bonus?’ So, if you go through that decision tree, it does actually give you quite a good structure for explaining why your endpoint was what it was when you come to write it up in the report and accounts.

Caroline

Absolutely. I think it’s also worth touching on, that actually whilst there will be this absolute focus on outcomes from incentives and needing to tell your story there, there are a lot of other disclosures within the DRR, which will require some thought in terms of how the decisions have been made as a result of pandemic, and what consequences that have in terms of what you may need to disclose. So, things like, if there has been a waiver, or a deferral or reduction of salary or bonus, that there are implications, and then what value would actually include in the single total figure. In terms of the shareholding requirement, can you provide some additional context around the impact of any change as a result of share price movement, and why perhaps the position looks the way it does.

CEO to employee pay ratio - so things to think about there in terms of how do you deal with the pay of furloughed staff, and what norm would you need to include. We had a question around how to evolve the CEO pay ratio, something here will be around potentially year on year trend will look very different this year versus last year, providing that additional explanation as to why that is, which ultimately is required by the regulations, but going beyond that boilerplate disclosure there would be critical. Or perhaps even providing some industry sector analysis as to how your ratio fits versus your industry sector will also provide that additional context and link to that appropriateness of pay that we’ve already touched on this morning. And then relative importance of spend on pay is actually similar to CEO pay ratio - you will need to think about what amounts include, in respect to particularly where there has been a lot of change to employee pay during the year.

So just conscious of time, I think I’m going to go through and pick up now some of those areas that we perhaps thought earlier that companies have not done, or performed less well, against Provision 41 of the UK corporate governance code. I do feel quite passionately that actually some of what we need to disclose in terms of, and build that story as a result of COVID-19, can be supported by really reflecting on what is the code asked of us to disclose, as I think there is a natural link there.

Just as a reminder this slide sets up the areas that were generally well reported versus those that were less well reported.

If we start with Strategic Rationale - so we have obviously seen the example from Schroders report, here is another example from SEGRO. There is an expectation that this goes beyond the strategic rationale that is typically included in the policy table, and try to demonstrate alignment between the broad strategic pillars and how they are linked to corporate KPIs and how that then feeds into the remuneration structure and performance measures. This will be critical as well this year, you will see that the code asks for this irrespective of the strategic rationale for remuneration structures as well as performance measures, this will also be critical for companies where they can change remuneration structure in the year. Thinking there to move the restricted stock, really presenting that strategic rationale, which will most likely, you will have gone through, and as you consulted with your shareholders will be key, trying to bring that through. And our view is, it is best done in some kind of diagram or table, and it is harder to convey in just narrative alone.

Appropriateness of Pay - so the code suggests this should be both in respect to internal and external measures, including pay ratios and pay gaps. Obviously, the regulatory requirement include the CEO pay ratio, but as I said, can you take that further, can you provide some industry analysis as to how you fit versus your peers.

External measures – you know we’ve touched on these with Schroders, you have got that external positioning relative to a benchmark. It is really key there to provide both the diagram, but also additional context, and providing that full picture, and then say something around, including a chart against the key KPI. So here you have got the example from Diageo, who have plotted the outcomes from their incentives versus key KPIs.

Implementation of Policy - so I have to admit this was probably the one, the disclosure under Provision 41, I was least clear on exactly what that was getting at when it first was introduced. But I think it’s is really trying to just provide that additional context, which is to illustrate that thinking that remuneration committees do, which is that sort of sense check to think actually is the outcome what we intended it to be when we set the policy. The best way of doing that, is actually to bring back, or to utilise those scenario charts that are required in your policy, to set out what did we anticipate say at a maximum target scenario and how has that actually played out this year, and bringing in some of that additional context determines how much value you save and driven by additional values from dividend equivalent or share price movement, I think is critical there.

Then the final one, which I think is really, really important and I think to Nic’s point, lots of companies are doing. I don't think they are necessarily reporting all the good stuff that's happening, is that engagement with employees on the alignment of pay. The Provision 41 disclosure requirement is to explain how you’ve engaged with employees to explain the alignment with wider company pay policy. So, it links to that broad employee voice part of the corporate governance pay is very specific on this engagement piece. I think we often found that companies that either said that there had been engagement, but they didn't really explain how have they done the alignment, or whether that was actually had been taken to employees, that it was kind of more of a statement that have been engaged with employees, but it wasn't clear whether the alignment piece have been touched on, again critical for companies to pick up on.

Really conscious of time, but just wanted to, I feel it's my duty to touch on the regulatory changes that are required from this year. So, a lot of you will probably be familiar with the Shareholder Rights Directive II was implemented and has effectively really broad purposes to bring the European Union in line with some of the disclosure requirements already required in the UK. Most of them, I don't think will be massively challenging, but one that we often receive questions on is the director versus employee pay increases. This is sort of similar but different to what is required under the 2013 regulation. Then it requires the comparison for all directors, and to build up to five years. So, I think some of the key questions we have had are around, do you need to show five years to begin with, the answer is no, and it needs to build up to that. Also, about doing the calculation itself, and if you do have any questions as you come to it, please do reach out, I am happy to help with that.

To wrap up, and I am sorry we haven't got any questions, we haven’t had any time to take any questions, if you have thoughts of anything as we have spoken today, please do get in touch. It is a real passionate topic of mine, so really happy to help, and I will answer any questions you have. What I wanted to say is that lots has happened this year, it has been a really challenging year for business. Context is critical, explaining those decisions, being really clear around what impacts the business has experienced, and all the stakeholders involved in that business, and explaining that well will be really critical.

I think you can use some of what Provision 41 asked for to support with that narrative, but my last piece is around structure. There has always been commentary that remuneration reports are getting longer and longer and longer, is there a way of thinking about your structure, so that you can more clearly tell your story, so the key messaging is clear and upfront and even it is not buried within the DRR. But I will stop there, I’m conscious it is one minutes past 10. Marcus, I don’t know if you have any final thoughts otherwise?

Marcus

Just very quickly Caroline, what I found very interesting and your passion comes across, and I feel very guilty that you are guillotined by time, probably because of routine and overextending comments from me, so apologies. I will just reiterate what Caroline says, we are very happy to give a view on reporting and how we think things should be done and this is an area where everyone wins. So, jokingly aside, other people's disclosures are very interesting because they are always things that can be developed and learnt, and we all benefit from greater transparency and greater understanding of all stakeholders and executive remuneration.

So, I just like to thank everyone, and I hope you have a good rest of the day. Take care.

Caroline

Thanks everyone.

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