Heads you win, tails they lose?

The evolution of executive remuneration in UK PLCs

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Article Type
Sustainability Soapbox
Topic
Responsible Investing
Published
March 05, 2025
Read time
5 mins
Author
Andrew Woods
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Since the turn of the century, executive remuneration has soared while remaining a politically sensitive subject that’s often difficult to justify to the wider public. While salary levels have generally risen at modest rates (at or just above the inflation rate), it is the “at risk” variable remuneration components that have soared.

 

Variable remuneration is generally split between an annual bonus and a long-term incentive plan. Ideally, greater focus is placed on the long-term element, with performance over at least three years – providing sufficient time to assess continuous progress.

 

This topic has gained significant media attention recently amid efforts to make the UK more competitive, including revisions to the Investment Associations Principles of Remuneration. As Aegon Asset Management UK had an active part in this review (Our Head of Responsible Investment, Miranda Beacham chairs the committee responsible for drafting the principles) we believe a summary of UK PLC compensation structures could be valuable.

 

Long-term plans have historically been structured as Performance Share Plans (PSP), under which shares vest dependent upon the extent to which performance targets have been met.

 

However, recently, we have seen the introduction of Restricted Share Plans (RSP). These involve granting shares at the beginning of a period subject to a performance underpin before release. This is essentially removing performance targets and so are accompanied by a reduction in grant value (to offset the increased expected value).

 

Barring leaving employment, this guarantees vesting. The underpin is imposed to ward against truly dreadful performance (e.g. ensuring banking covenants are not breached).

 

Whilst, RSP adoption remains limited, their popularity is growing. Investment Association guidelines stress that companies should only introduce such plans under exceptional circumstances. However, exceptional circumstances are subjective, and we have seen companies introducing such plans simply due to a lack of vesting under conventional PSPs (due to poor performance). We rarely support such arrangements without compelling justification.

 

Whilst very much in their infancy, consideration is now being given to hybrid plans that combine both performance and restricted share elements, offering participants guaranteed shares alongside performance-based awards. Ashtead Group Plc, primarily a US company, controversially introduced such a plan that narrowly passed with just 60% shareholder support.  Participants in this plan are now among the most well rewarded in the FTSE 100 – even more than AstraZeneca, a global company with much larger market cap.

 

The last type of long-term plan is the Value Creation Plan (VCP). These are introduced in very specific circumstances, with challenging share price targets that must exceed a pre-determined threshold above market cap. There are, however, risks associated with such plans as they fall, to a certain extent, outside of management control and therefore reward is not always aligned to performance. Retention issues can also arise following vesting unless the VCP is replaced by a similarly generous arrangement.

 

It is not in remuneration consultants’ interests to maintain the status quo, so as we approach this year’s voting season, we anticipate new proposals with innovative structures that will require careful evaluation. It has a very strong feeling of déjà vu for the team – having been around for a few decades we have seen this all before when the “fashion” changed from share options to Long Term Incentive plans in the early noughties. I wonder what the next change in fashion will be?

Disclosures
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Author

Andrew Woods
Responsible Investment Manager
Andrew Woods is a responsible investment manager responsible for voting and engaging with the companies held within the equity and multi-asset portfolios.
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