remuneration forum october 2014

Remuneration Forum

Where next for executive pay?

1 October 2014

2014 issues and implications

Caroline Johnson

2 © 2014 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.

2014 issues and implications

Simplicity and transparency

Alignment with long-term success of the business

Stre

tchi

ng p

erfo

rman

ce m

easu

res


Alignment to long-term success

Incentive plans

■ Deferral of part of annual bonus is the norm within the FSTE 350, and over 80% of plans are mandatory deferral with no match

■ Annual bonus deferral typically three years with pro-rata vesting

■ Some evidence of new long-term incentive plans (LTIPs) with longer vesting periods or introduction of holding periods (total five years typical)

0% 20% 40% 60% 80% 100%

FTSE 100 CEO

FTSE 250 CEO

Short term Long term

Source: KPMG analysis of FTSE350 Annual Reports and Accounts 2013 - 2014.

Remuneration mix - short term:long term (actual)

0% 20% 40% 60% 80% 100%

FTSE 100 CEO

FTSE 250 CEO

Remuneration mix - short term:long term (max)

Short term

Long term


Alignment to long-term success (cont.)

Malus and clawback

Originated in the FS sector – now incorporated into the Corporate Governance Code.

D1.1 Schemes should include provisions that would enable the company to recover sums paid or withhold the payment of any sum, and specify the circumstances in which it would be appropriate to do so.

Some confusion as to whether it is “or” or if wording will be interpreted as “and”

■ Majority of FTSE 350 companies disclose that they have malus/clawback

■ However analysis of a sample of companies shows that:

– Some companies who mention clawback in their policy, actually describe a malus clause and not clawback

– A smaller number of companies who mention clawback in their policy, do not provide any further details

■ Two thirds of new LTIPs put to shareholders have clawback and malus, a small number have no disclosure and the remainder have malus only

So some work to do on this point – consider legal and tax implications and impact on remuneration policy


9%

150%

100%

91%

37%

100%

100%

63%

Alignment to long-term success (cont.) Shareholding guidelines

6%

235%

200%

94%

FTSE 100 ■ Set policy

guidelines ■ No policy

guideline ■ CEO

shareholding as a percentage of salary

■ Other Directors shareholding as a percentage of salary

FTSE 250 ■ Set policy

guidelines

■ No policy guideline

■ CEO shareholding as a percentage of salary


Small Cap ■ Set policy

guidelines ■ No policy

guideline ■ CEO

shareholding as a percentage of salary




Stretching performance measures

■ Annual bonus payments remain significant for many companies

■ Disclosure often limited

■ This continues to be an area of concern for shareholders

CEO Actual annual bonus paid as a percentage of the maximum

0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0%

0% - 10%

10% - 20%

20% - 30%

30% - 40%

40% - 50%

50% - 60%

60% - 70%

70% - 80%

80% - 90%

90% - 100%

Percentage of Companies

Per

cent

age

of M

axim

um B

onus

O

ppor

tuni

ty

FTSE100 FTSE250 Source: KPMG analysis of FTSE350 Annual Reports and Accounts 2013 - 2014.


Recruitment principles

Transparency: Remuneration disclosure

Discretion in the remuneration policy ■ Exceptional or genuinely unforeseen

circumstances – To make larger LTIP awards – To increase the level of annual bonus – To take actions outside of the normal policy

limits – Recruitment

Disclosure of performance targets ■ Policy includes only general

statement ■ Many companies rely on

commercial sensitivity exemption, particularly for annual bonus

■ Difficult to assess whether “stretching”


Additional clarification provided in a number of cases following publication of annual report

0%

20%

40%

60%

80%

FTSE100 FTSE250 Small Cap Pay in line with existing policy RemCo discretion - no cap disclosed RemCo discretion - cap disclosed


Complexity

■ Number of performance measures used in LTIPs in the FTSE 350 is increasing

■ Over 40% of new plans put to shareholders have 3 or more measures


33%

42%

24%

32%

26%

41%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

One Two Three+

FTSE 350 New plans - Number of Measures

2013 2014


The shareholder view

Percentage of companies with a significant vote against (significant=20%+)

9% 10%

9%

8%

7% 7%

5%

9%

0%

2%

4%

6%

8%

10%

12%

FTSE-All Share FTSE-100 FTSE-250 FTSE-Smallcap

Per

cent

age

of c

ompa

nies

with

sig

nific

ant v

otes

ag

ains

t

Remuneration report Remuneration policy



The shareholder view (cont.)

Actual votes against policy and remuneration report (companies with a significant vote against)

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

Per

cent

age

of v

otes

aga

inst

Remuneration report Remuneration policy



Issues for 2015

■ Simplicity is not necessarily possible – but it should be clear

■ Votes against the annual remuneration report should not be ignored

– although the median vote in favour remains at over 95% an increasing number of companies fall into the 80%-90% range

– shareholders will focus on use of discretion and disclosure of performance targets

– regulations require publication of votes, a summary of reasons for votes against and actions taken

– majority vote against annual report triggers a policy vote (and significant vote against likely to impact next policy vote)

■ In 2015 no requirement to include policy, but consider a summary to set context, and need a statement about implementation in the following financial year

■ Changes in best practice go beyond the main market so be prepared

Putting Executive Pay in Context

Prof. David De Cremer

KPMG chair in Management Studies

University of Cambridge

Executive pay in 2015 – what needs to change?

David Ellis Partner


The question you dread...


How do you pay …

1. To whom? 2. Over what period of time? 3. For doing what?


How much do you pay …

1. Too much 2. Not enough 3. Just right


How do you pay …


Huge energy is expended on the efficacy of subtle tweaks to incentives

■ Compulsory deferral of bonus

■ Three to five year performance periods/deferral periods

■ Movement from EPS to ROCE (say)

■ Change from 50/50 TSR and EPS to a matrix approach

■ Move to (more) non financial measures


Huge energy is expended on the design of the ‘next big thing’

■Use of ‘career shares’ ■ Pre grant performance measures ■ Long term holding thereafter ■ Length of pre grant performance period ■Use of post grant underpin/adjustment


Three defining principles …

1. The longer you have to wait, the less it is worth

2. Executives are risk averse 3. Complexity destroys value

Source: Dr Pepper S., Campbell, R., 2014. Executive reward - a review of the drivers and consequences. CIPD Research


And this means …

1. All pay structures are inefficient 2. But some of them may be useful


How much do you pay?

Understanding the four lenses of pay


What is the difficult piece of the jigsaw?

1. Deciding how much to pay a CEO? 2. Explaining how you have decided that

is the right amount? 3. Explaining why it is the right amount in

one year, when the pay in year is a composite of a number of years of performance?


The ‘talent’ lens

Book Word count

1 76,944

2 85,141

3 107,253

4 190,637

5 257,045

6 168,923

7 198,227 £85m per book

7 books

£600m earnings

£553 per word

Source: Estimated based on information in public domain

Consider J. K. Rowling, author of the Harry Potter fantasy book series:


The ‘performance’ lens

Bonus payout vs. change in profit 2013

Profit change bands Count Average %

of Max > 100% 14 86.51%

50% - 100% 13 88.12% 30% - 50% 14 88.41% 20% - 30% 13 86.36% 10% - 20% 16 84.43% 0% - 10% 9 79.35%

(10%) - 0% 11 78.85% <(10%) 17 79.87%

• One third of companies paid their CEO a bonus of 80 percent of the maximum value allowable

• One quarter of these companies experienced a fall in profit during the relevant year



The ‘ownership’ lens

Source 1: High Pay Centre, July 2014. Cheques and the City: pay for top lawyers and accountants Source 2: Estimated based on information in public domain

• Average partner remuneration in accounting firms: £700k1

• Consider Mike Ashley, Executive Deputy Chairman and Founder of Sports Direct: • Opted out of

£180m bonus2

• Sold shares worth £220m


The ‘profit’ lens

Its quite simple ... • Pay is, in part, a product

of the capacity of the business to make profit

• Businesses that have the potential to make a lot of profit, will pay more than those that do not


The four lenses in practice

REGULATION


And all this means …

1. We need a different language to disclose pay that views pay honestly through at least four lenses

2. We need to be able to adjust the disclosure of in year pay to reflect the longer term nature of pay

Thank you

We offer remuneration advice as part of our broader workforce offering; find out more here, or if you have any specific event questions or comments please do not hesitate to email the team.

http://kpmgmail.co.uk/collect/click.aspx?u=/G1GTPto3VWHuy7wMzDtDRlgKJwfpRdeR46JkwpJrnEW4zmfbY7BWuWCXMgxNt2M7MiH+L97Ved5r9RxBLKiR1P/Z8IAlA6fyo93snDZpr1FxKFKThMDrjA9XSKrimR7d+6xi1LDOhUatvFK0jp/o4ag6TYX4dxejGJiQtg2yiRsukl3H2mmIcrpQ4VGm5QJ+IE8UHH9fbqhk9XQv8niMFcUiMm8L1u8&rh=ff001813a026c349656b23520a459720e9393e41


Contact details

Rupal Patel Director, KPMG LLP

Tel: +44 (0) 20 7694 4708 [email protected]

David Ellis Partner, KPMG LLP


Caroline Johnson Senior Manager, KPMG LLP


Jessica Sales Manager, KPMG LLP


The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

© 2014 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.

The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International Cooperative (KPMG International).

remuneration forum october 2014

Business

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kpmg international cooperative

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annual bonusdifficult

percentage of salaryftse

percentage of salarysource

shareholding guidelines6

level of annual bonusto