New board pay rules are they working? Key statistics

New board pay rules are they working? Key statistics

Linklaters Incentives Practice New board pay rules are they working? Many of the world s largest companies rely on our global incentives practice to advise on their most complicated remuneration issues we deliver quality legal advice with practical commercial solutions across the globe. Contact details: Gillian Chapman Partner +44 207 456 3708 gillian.chapman@linklaters.com For the first time this year companies have had to submit their board pay policies to a binding shareholder vote. There has also been a significant increase in the disclosure requirements with companies having to include, again for the first time, a single pay figure in a consistent way that enables comparison across companies. One significant impact of the new rules has been the increase in shareholder consultation. As a result there have been fewer headlines (although board pay always seems to be in the news) and more importantly fewer shareholder revolts. In 83 out of the FTSE 100 companies, over 85% of shareholders who voted approved the remuneration policies, and no policies were rejected. This is a slight improvement on last year. So have the new rules been a success? That remains to be seen. Many companies, with the approval of shareholders, retained discretion on salary and salary increases and flexibility on recruitment policies. It will be interesting to see whether these discretions are exercised in the way shareholders intended. The information below shows some interesting emerging market practice for the FTSE 100 companies. The picture which emerges is that companies have retained at least some element of discretion and investors have recognised the necessity for this. We predict that 2015 will be a quieter year, if only because policies need not be approved again (unless amended) before 2017, although no doubt board pay will continue to attract headlines. The charts refer to numbers of FTSE 100 1 companies, using data from their remuneration reports and the IVIS reports on them. 1. Unless otherwise stated, the data excludes 17 companies: 11 were incorporated outside the UK and 7 reported under the previous rules due to their year ends.

IVIS reports 2 Start date for the remuneration policy Basis on which pay increases may be made 2014 Remuneration policy Salary in policy table 1 2013 FTSE 100 FTSE IVIS 100 reports IVIS reports (all 100) (all 100) Pension in policy ta 80 Salary increases in line with 70 60 50 2013 2014 40 30 20 10 0 Blue top 63 2013 Amber/orange top 35 Red top 0 80 Blue top 44 AGM 78 2014 2014 Remuneration Remuneration Salary policyin policy table 2 Salary in Salary policy Benefits in table policy 1in table policy 1 tab Amber/orange top 52 Other 5 Other employees 78 Changes in role/responsibility 63 Red top 4 Market levels 57 Individual performance 45 Company performance 45 Other 27 70 There was a significant increase in the number of amber IVIS reports in 2014. The biggest 60 reason for this was companies retaining discretion in pay policies particularly on recruitment. There were also four red reports this year, though without any general themes to them. 50 2. The data in this chart relates to all FTSE 100 companies. For 2013, there were no reports for 2 companies. 40 Most companies followed corporate governance guidance and applied their new pay policy from the date of the annual general meeting. Many companies set out what they would take into account when deciding whether or not to make any pay increases. 30

Benefits Annual bonus Many companies did not disclose the performance measures for annual bonuses in their policy. Neither did they set out in any detail the performance targets for the year ahead. A significant number said they would disclose Salary in policy Pension table 2 in policy table targets Benefits at in the policy end table Annual of the 1 year bonus when 1 the amount of the Annual bonus bonus was to 2be LTIPs reported, but many also said that disclosure may be withheld because of FTSE 100 UK companies bound by FTSE new regulations 100 UK (83/100) companies bound by new regulations (83/100) commercial sensitivity. Long Term Incentive Plans (LTIPs) Most companies disclosed the performance targets for LTIP awards. Recruitment CEO remuneration v other employee 1 rem Maximum benefit level stated? Measures disclosed in policy table? 3 Disclosure of performance targets Disclosure of performance targets 4 Yes 12 No 71 ry in Salary policy in Pension table policy Benefits 1 table in policy 3in policy table table 1 Pension Benefits in policy in policy table Annual table Annual bonus 2 1bonus 2 Annual Annual bonus 1bonus Recruitment LTIPs 3 remuneration 1 Recruitment CEO LTIPs v other remuneration employee remunerati 2 Although many companies did not set a maximum cap on benefits, they did set out the basis on which benefits would be provided. Yes 26 No 53 3. Four companies did not have bonus as part of their remuneration structure. End of performance year 22 End of performance year, 12 unless commercially sensitive When no longer 30 commercially sensitive Disclosure not mentioned 15 Disclosed for year ahead 52 Will disclose at end of year of award 4 Will disclose at end of year of award, 3 unless commercially sensitive Some targets disclosed for year 9 ahead, others not disclosed due to commercial sensitivity Some targets commercially 2 sensitive, disclosure of others not mentioned Other 5 3 Disclosure not mentioned 6 4. Four companies did not have LTIPs as part of their remuneration structure. 5. Companies may provide more details later.

Recruitment policy Most companies retained discretion to allow for payments to new directors to buy-out existing awards. Annual bonus LTIPs 2 panies bound by new regulations (83/100) CEO pay relative to other employees Under the rules companies have to show a comparison between the change in pay for the CEO and the change in pay for other employees. While some companies chose all employees as a comparator, many chose other groups. Recruitment CEO v other remuneration employee remuneration 1 This drew some criticism from the High Pay Centre. Specific mention of ability to make buy-out payments? Higher initial variable pay opportunity? Comparison of CEO v other employee remuneration Yes 81 Annual Recruitment bonus remuneration 3Annual bonus 1 1 Recruitment remuneration 2LTIPs CEO v other employee remuneration No 2 Yes 27 No 56 All employees 26 Other comparator group 55 Unknown/no details provided 2 A number of companies also said they may go outside their normal pay policy when recruiting.

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