UK: Investors Are Pressing Boards On Executive Pay

Last Updated: 18 April 2018
Article by Oliver Parry

Remuneration will once again be the main issue of contention between companies and investors

In February, Morrow Sodali published its annual Institutional Investor Survey, which sought to measure investor expectations on a range of environmental, social and governance (ESG) issues.

The survey is designed to help boards more easily understand investor priorities and the 2018 edition, the third of its kind, received responses from 49 global investors, managing a combined $31 trillion in assets.

Participants expressed their views on matters such as ESG engagement, board practices, activism and investment stewardship strategies. However, once again, it was executive pay that stood out as the primary theme.

According to the survey, institutional investors are expecting to up the ante when scrutinising pay policies, demanding enhanced disclosure of pay metrics, seeking a closer alignment between pay and performance, and also searching for an approach that more effectively links pay to the interests of employees and other long-term stakeholders.

Although it is hard to anticipate the reaction each specific resolution may receive from investors, the institutional investor survey is a useful source of information that can help guide governance professionals' thinking ahead of the AGM season.

An important juncture

The debate around corporate governance in the UK has shifted substantially in the last decade. After the financial crisis in 2008, regulators scrambled for solutions.

As a result, the UK Corporate Governance Code, the bastion of good corporate behaviour, was revised in 2010 and 2012 by the Financial Reporting Council. Alongside this, substantial regulatory changes were introduced by the then Financial Services Authority.

Its successor, the Financial Conduct Authority, introduced a revised remuneration code and the new Senior Managers and Certification Regime.

"The recent collapse of Carillion may well spark yet another review of our system of corporate governance standards"

Between 2014 and 2016, there appeared to be a period of reflection and consolidation. Regulators and UK ministers wanted to give the post-financial crisis changes time to bed in before doing anything else.

However, the unexpected and sudden collapse of the retailer BHS in 2016, which left a huge pension deficit, focused policymakers' attention again on how our biggest companies are run.

Substantial alterations to the UK Corporate Governance Code as well as a raft of legislation have now been proposed, and although the recent collapse of Carillion may well spark yet another review of our system of corporate governance standards, we nevertheless already stand at an important juncture.

Litmus test

It is often said that the litmus test for how well our system of codes and standards are working is the AGM season.

Since the so-called 'shareholder spring' of 2012, investors, regulators and other opinion formers have scrambled for solutions to the apparent escalation of executive pay and rising rewards for CEOs and other executive directors.

Despite this, according to the survey's respondents, once again executive pay will be one of the main areas where boards and shareholders are likely to disagree. It would be an understatement to say that it is well-trodden ground.

It is difficult to estimate just how many roundtables and corporate governance events addressing this topic I have been to in total, but in 2017 alone I attended at least 14 events related in some way to high pay.

Pay ratios

Based on the survey, further pressure will be put on companies with excessive pay practices, particularly when the CEO pay ratio is introduced.

The CEO pay ratio has already been introduced in the US, following the passing of the much-hyped Dodd-Frank Act from 2010, and it is expected to come into force in the UK shortly. Indeed, 61% of respondents suggested the pay ratio will be a useful statistic.

Many respondents stated that this is a good starting point, but according to one investor: 'It may not have immediate value. However, the statistic would be useful to track over time and compare with peers.'

Comparatively, some of the respondents indicated: 'A better tool would be CEO pay vs the average in the executive committee.'

Many respondents suggested companies should continue to increase engagement with key stakeholders to discuss the logic behind the rationale and its appropriateness. The pay ratio mechanism will certainly put the spotlight on company pay but questions are being raised whether this alone will effect change.

Respondents want the culture within capital markets to change and businesses, remuneration consultants, head-hunters and other key players, such as shareholders, will all play important roles in this.

Better links

Currently, the link between executive pay and company performance is negligible, according to many in this survey, and this has fuelled arguments for reform of corporate compensation packages, with an overwhelming 88% of respondents stating 'pay for performance' is the most important executive remuneration issue.

'Rigour of performance targets set under incentive schemes' was the second most important issue, with 46% of respondents suggesting it as a key issue – however, compared to last year, this was a 16 percent-point drop.

When evaluating remuneration plans, institutional investors are interested in receiving information on the sustainability metrics used, particularly those linked to a company's risk management and business strategy.

For example, the incorporation of climate risk into remuneration plans is likely to be a key topic for the most exposed industries.

"The worst case scenario is governments cap pay or increase taxes to rein in excessive pay"

Investors increasingly expect remuneration committees to create the right structures for their businesses and strategy, which clearly links pay to the long-term success of the business.

It is also expected that remuneration committees make better long-term decisions and it is important that the remuneration committee chair has a proper understanding of the company strategy and its performance drivers.

Investors recognise the sensitivity behind disclosure of targets but there is an appetite for better explanations why a target might be commercially sensitive and for companies to provide more colour on the timeline for metrics to be disclosed.

Investors are also seeking more granularity around how performance metrics are aligned with the implementation of the company's long-term strategy and how they are linked to long-term value creation for shareholders.

Some 73% of respondents agreed that it is 'very important' to have better disclosure on metrics, especially those related to business strategy and performance. The remaining respondents (27%) agreed it is 'important'. Perhaps even more importantly, zero respondents said it was 'not important'.

Engage on the issues

For many opinion formers, executive pay is the gift that keeps on giving. However, as this survey points out, there is a clear desire on behalf of investors to make a change. It of course needs to be a two-way street.

Boards must be willing to address the issue head-on and engage with investors, especially when revising or setting a new remuneration policy. Equally, investors must, when they feel it is an issue, engage directly with boards.

Carillion is another obvious example of why the issue of high pay will once again emerge as a key theme in the 2018 AGM season. Regulators, politicians and journalists will continue to demand better alignment between pay and performance, both pre-emptively and retrospectively.

However, the worst case scenario is that governments actively consider capping pay or increasing taxes to rein in excessive pay, as stakeholders become increasingly marginalised.

Only proper engagement on this topic, between the owners of the company, namely the investors, and its custodians, the board, can prevent this. A private sector solution is better than more government interference and regulation.

Oliver Parry is corporate governance director for the uk at Morrow Sodali Group, and is speaking at ICSA's annual conference

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions