Keavy Ryan

A&L Goodbody, Dublin

Kryan@algoodbody.com

Introduction

Public scrutiny has increased in the arena of executive remuneration generally but in the wake of annual general meeting (AGM) season, the world has been watching. Director's remuneration can often be an area of contention with shareholders and AGM season particularly casts a light on the challenges faced by boards as shareholders have their say on pay. 2022 has been no different and a recent shareholder vote in the United Kingdom against a Chief Executive Officer pay package has been dubbed as the largest protest of its kind since 2009.

This article sets out some of the issues that remuneration committees have had to face during the 2022 AGM season.

The business environment in 2022

The Covid-19 pandemic continued in full force as we rang in the New Year. Thankfully, it quickly became evident that the impact of yet another wave would not eliminate all possibility of a return to the 'new normal'. However, with the devastating war on Ukraine and inflation hot on its tails, it was clear that 2022 would be no normal year, presenting even greater hurdles for businesses to overcome. Set out below are some of the hot topics which have made their presence felt so far this year.

Environmental, social and governance (ESG) influence

With regards to executive remuneration, the backdrop of 2022 is important. With companies struggling to meet net-zero targets, more companies are beginning to realise that their success may hinge on tying executive pay packages to ESG targets.

Therefore, it comes as no surprise that ESG performance measures now form the most common key performance indicators (KPIs) for annual bonuses and long-term incentives.

The focus on ESG during the 2022 AGM season is no surprise given that in 2021, large corporations faced shareholder demands for tougher climate policies with certain board members being replaced with ‘climate-competent’ board members.

Reputational risks

The reality of the environment within which companies do business can heavily influence public and investor perception of company actions, in particular the rewarding of executive pay packages.

A clear example of this has been the negative reaction to UK companies availing of government support but continuing to make dividend payments and lucrative bonuses. Another example were the challenges to remuneration proposals where workers have lost jobs or taken pay cuts, particularly if these have not been reinstated.

Earlier this year, 30 per cent of investors in a large UK company voted against the company's pay policy where large share awards were allocated to executives while many workers suffered without pay during the pandemic.

Companies need to continue to remain sensitive to the current economic climate and its widespread impact when making decisions around executive remuneration, in particular now given the cost of living crisis.

'More is more' when it comes to disclosures

With regards to disclosures, investors are now seeking a better explanation of how executive remuneration and chosen performance metrics are aligned to the company's purpose, value and strategy rather than a statement of 'it's just linked'.

Investors now expect a little more meat to disclosures. An example of this being that, if peers are used as a comparator, that should be specifically and clearly called out.

Again, this is about adding a bit more colour to disclosures made in relation to the activities of remuneration committees, how they operate and the various powers that they have in relation to incentives.

The use of discretion

Any exercise of discretion should only ensure the outcomes of executive pay schemes properly reflect overall corporate performance and the experience of shareholders and in addition the general market environment.

The key point here is that investors are increasingly looking for more substance. They are really expecting more information and justification from companies as to how and why particular incentives are structured in a particular way.

Conclusion

Companies can and should expect shareholders to continue to scrutinise executive incentives through the lens of the broader workforce and stakeholder groups in the year ahead.

Awards cannot and should not be made in a vacuum and companies need to remain alive to the various ESG factors that continue to orbit their worlds.