Larger companies more likely to be early adopters of new practices on pay reporting, KPMG research shows

EXECUTIVE REMUNERATION

Larger companies more likely to be early adopters of new practices on pay reporting, KPMG research shows

Half way through the AGM season, there are signs that the “shareholder spring” has re-emerged among smaller companies but dissent on pay has reduced significantly among larger listed companies.

The remuneration team at KPMG in the UK has analysed shareholder voting at Annual General Meetings up to 31 May 2013. They found that it was among the “smallcaps” where the highest levels of dissent were observed, with one in five companies experiencing major objections to their pay plans, up from 9% last year. By contrast, among FTSE 100 companies, levels of shareholder dissent had halved.

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David Ellis, head of reward at KPMG in the UK, said: “With over half of the voting season done, it seems fair to say that we’ve seen something of a resurgence of the ‘shareholder spring’ amongst the small caps but a marked decline in dissent on pay at the larger end of the market. Where we have seen shareholders objecting, it’s been similar to last year in that the dissent relates to specific circumstances and issues. These are usually not solely pay related, but instead driven by a combination of dissatisfaction around corporate performance and the leadership of the business.”

KPMG reckons the contrast between the reduction in shareholder dissent on pay at the larger end of the market and its increase among smaller companies, is likely to be a result of the efforts made by larger companies to improve their practices, procedures and communications on their pay policies.

Ellis said: “The smallcaps have some catching up to do with their larger listed peers. Bigger companies tend to spend more time and resources on shareholder communications. Additionally, our research suggests that it is the larger end of the market that are the ‘early adopters’ of new BIS ‘two reports’ format on pay which will become mandatory next year.”

New executive pay reporting regulations

The new BIS regulations coming into force next year will oblige companies to produce two reports on pay:

• One is a policy report which will require companies to set out their remuneration policy for the next three years for shareholder approval in what will be a binding vote, in contrast to today where the vote is advisory only.
• The second report is on the company’s implementation of existing remuneration practices and is backwards looking. Here the vote remains advisory.

According to KPMG’s research, adoption of this new format is generally higher among the larger end of the market. As the new format comprises a number of separate requirements, the data below is an aggregation of the main elements. These are as follows: 

• Two report format, which splits the report into a policy and an implementation report.
• Table of the elements of pay, which sets out each element of remuneration, its purpose and link to strategy.
• Scenarios graphs, which set out what each executive director would receive in the event of “minimum performance”, performance in line with budget/plan, and outperformance.
• Single figure of total remuneration, which sets out the total aggregate remuneration received by each director during the past year.

Percentage of companies adopting the main elements of the new reporting format
FTSE Constituent:
FTSE All Share: 10%
FTSE 100: 15%
FTSE 250: 9%
FTSE Small Cap: 5%

Ellis said: “The figures show clearly that it is generally the larger companies that are the early adopters of the new practices on pay reporting.”

The small caps have the most to do in terms of getting ready for next year’s new rules. KPMG reckons the key challenges they face are as follows:

• Clearly linking the elements of pay to strategy.
• Formulating a policy that shareholders will approve but gives the Remuneration Committee sufficient flexibility and the ability to exercise discretion when needed.
• Producing the required information in the prescribed format.

Increase in number of new long-term incentive plans

Last year, KPMG predicted that there would be a significant increase in the number of long-term incentive plans. Many of the existing plans were approved nearly ten years ago and therefore needed to be replaced.

This prediction has been borne out: the percentage of companies across the market proposing new or amended share plans has more than doubled from 7% in 2012 to 15% this year.

Again the data indicates that there is more dissent on pay among smaller companies, with the percentage facing votes against share plans exceeding 20%, over four times that observed in the FTSE 100.

A final word

“Last year we said that reports of a widespread shareholder spring were exaggerated and what we were actually seeing was a small number of cases where shareholders focused their attention. With the exception of the smallcaps, we are seeing the same again this year and we expect it to continue into next. Companies now face a triple challenge:

• Shareholders being more willing to challenge poor remuneration practices and corporate underperformance in what remains a challenging economic environment.
• The need to replace a large number of long-term incentive plans in the next few years.
• The requirement to adopt BIS’s new remuneration reporting requirements by next year.” - David Ellis, head of reward at KPMG in the UK.
  
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KPMG is a global network of professional firms providing audit, tax, and advisory services. It operates in 156 countries and has 152,000 professionals working in member firms around the world. KPMG LLP operates from 22 offices across the UK with over 12,000 partners and staff.

To find out more visit www.kpmg.co.uk.