Have your say: boardroom pay is biggest issue this AGM season

There could be fireworks in the months ahead as companies risk getting it wrong on director pay.

AGM voting in the coming months will set shareholders a unique set of challenges as they decide whether companies have shown the right approach to pay in light of Covid-19.

Remuneration will be a particularly thorny issue at those firms that required furlough and other government support, made staff redundant or had to cut or axe dividend payments.

At the same time, remuneration committees will be under pressure to recognise the efforts of management who were instrumental in keeping businesses afloat during the pandemic. They will also be mindful of the need to keep their leadership incentivised.

Finding a level of remuneration that is appropriate and fair is a balancing act being played out in boardrooms up and down the country ahead of the main AGM season starting in April.

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Some early reporters like Virgin Money UK (LSE:VMUK) have already had these conversations, with the FTSE 250-listed lender due to present its annual report to shareholders at its AGM on Thursday.

The chair of Virgin's remuneration committee Darren Pope has told them that the company's arrangements in the past year were characterised by “additional restraint” and designed to reflect the experiences of all stakeholders.

The only bonuses paid were £500 to all staff below senior management level to recognise their efforts in keeping services going during the pandemic. Otherwise, no bonus or annual salary increases have been awarded to directors in respect of 2020 trading. 

Pope said: “This was a difficult decision given the board’s view that the team has delivered an exceptional level of performance in navigating the group through uncharted territory and, at the same time, protecting customers and colleagues.”

CEO David Duffy's single figure total remuneration reduced to £1.4 million from £2 million a year earlier, once you exclude the one-off bonus of more than £1.3 million paid in 2019 relating to the company's demerger from National Australia Bank in 2016.

The boss of the UK's sixth-largest bank, which has 6.5 million customers, also donated one-third of his salary to charity for the final six months of the financial year to September.

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Many other companies acted swiftly at the start of the pandemic to show that their directors were playing their part. This at a time when difficult decisions were being made in terms of staff losing their jobs or having to cut shareholder distributions.

In a briefing paper published this month, remuneration consultancy FIT said the Covid factor was an “inescapable consideration” for remuneration committees.

FIT's analysis of 31 recent company reports showed two-thirds of directors received no annual increase in pay, compared with one third in recent years. Of those making increases, the majority were aligned with employees in a range of 2%-3%.

It warns that shareholder lobby groups and investors are likely to take a dim view of companies attempting to “catch-up” on salaries after freezing them in the last year.

In terms of annual bonuses, FIT said around half of early reporters paid no bonus and only two went for the full entitlement. One option that may be considered by companies is to pay the bonus in shares or to defer the award.

Overall, remuneration committees will have to carefully balance operational risk with reputational risk: FIT said: “The communication of the rationale — both internally and externally — will need to be especially effective and the decisions (whichever way they go) are unlikely to be popular with all stakeholders.”

Companies will also need to carefully consider the timing of long-term share awards, particularly how grants are influenced by a lower share price. Finding the most appropriate performance metrics will also be a challenge at a time of uncertainty over trading.

It expects that more companies will buy themselves time by disclosing their grants after AGMs rather than at the time of full-year results.

As well as Virgin Money, next week's AGMs for Paragon Banking Group (LSE:PAG) and Gooch & Housego (LSE:GHH) will also highlight some of the Covid-19 challenges facing remuneration committees and shareholders this year.

Paragon Banking Group (Wednesday 24th, 9am)

The provider of mortgage finance for UK landlords sought additional feedback from shareholders last year after more than 20% of votes cast at the 2020 AGM went against the company's remuneration report and policy.

As a result of these discussions, changes to salaries and pensions originally dated October 2019 were deferred to the day after their approval at last February's AGM. Paragon also disclosed the customer metrics used in the grant of long-term incentive awards.

In light of the company's resilient performance during the pandemic, this year's annual bonus for executive directors of the Solihull-based company will be 66.1% of the maximum opportunity, a 34% reduction on the 2019 level and with no cash element.

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Chief executive Nigel Terrington received fixed and variable remuneration totalling just over £2 million, compared with £3 million the year before.

The annual report noted that the group did not use the furlough scheme, make any redundancies due to the pandemic and its share price in the FTSE 250 index held up well compared to its peers. There was no interim dividend but a final one of 14.4p is due to be paid subject to approval at the AGM.

No salary increases for directors are planned for the current financial year, while the earnings per share targets in long-term bonus awards granted in December have been updated to maintain an appropriate level of stretch.

Shareholders can register to watch the AGM online, but the deadline for submitting questions has passed. Proxy votes also need to be received by 9am on Monday.

Gooch & Housego (Wednesday 24, 11am)

The AIM-listed photonics firm is planning a one-off award of options to ensure it retains and motivates executive directors and achieves continuity during Covid-19.

With share scheme awards under water and bonus targets not met in the past two years, management face a five-year wait to realise value from any new awards as their long-term incentive plan includes a two-year holding obligation. 

The Ilminster-based company is part way through a significant programme of integration and consolidation and is highly reliant on management's knowledge of its sites.

Brian Phillipson, the chair of the recruitment committee, said: “Any new recruitment would be difficult in itself but it would be particularly difficult for any new recruit to become familiar with our businesses given the ongoing restrictions to travel.”

After consulting major shareholders, the company plans to grant one-off options with a reduced vesting period to the normal incentive plan grant. It includes the potential for chief executive Mark Webster to receive 80% of his £350,000 salary.

Virgin Money UK (Thursday 25th, 9am)

The lender's long-term bonus awards are subject to performance conditions, with the external trading conditions meaning only 32% of the maximum opportunity was achieved in the 2017 scheme.

The 2020 version was granted in December without specific targets on the financial element, which accounts for 55% of the total. Virgin has pledged to engage with shareholders during this year to establish the targets as more clarity emerges on trading.

At last year's AGM, the company's remuneration policy was passed with 99.5% support but the annual remuneration report saw 17.3% opposition. It said there has been little change in the way its remuneration is structured since last year's meeting.

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The AGM takes place at 9am, with the last time for the receipt of proxy voting forms being 9am on Tuesday. The deadline for submitting questions has already passed.