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Bonuses are back and investors in British companies are ready for battle.
Leading shareholders told the Financial Times that they expect companies to exercise restraint in awarding executives this year as the cost of living crisis hits many of their workers worse.
“Pay is always a sensitive topic but is brought into focus at a time when wider society and companies’ own employees are feeling the pressure,” said Amy Wilson, UK engagement lead at Federated Hermes, which manages $624bn in assets. is
“We are looking at how officials are treated compared to other stakeholders like employees. We don’t want to see executives unduly insulated [from financial pain] while other stakeholders are not.
This year is set to be particularly problematic for boards because some bonuses have reached record levels, boosted by easy-to-hit targets set during the pandemic, even as many employees have been offered below-inflation pay increases.
Neville White, head of responsible investment policy and research at EdenTree Investment Management, said “There has been a strong rebound in the bonus culture . . . much of which we feel is unjustified in the midst of an economic downturn.”
But some executives are preparing to argue that they need to be careful about cutting salaries too much given the need to attract and keep the best candidates for top roles.
Some executives are being offered higher salaries in privately owned businesses away from public scrutiny, and despite the slowdown facing the UK many companies with large international businesses are doing well, with bosses saying they need pay based on performance rather than politics.
Romi Savova, chief executive and founder of PensionB, said “there are pockets in the market where salaries need to be reined in, especially if they are artificially inflated by the effects of war, rising interest rates and energy shortages.”
But she added: “We must reward and incentivize hard work, so there needs to be a balance and every company will need to make decisions that will ultimately reflect the fairness that all their stakeholders expect.”
Martin Sorrell, executive chair of advertising start-up S4 Capital, said incentives at his company would be performance-based. “We will rise and fall on that.”
Sorrell pointed out that only 5 per cent of S4’s 9,000 staff were in the UK, meaning that bonuses to its entire workforce would not be penalized by operations in just one country.
He added that pay would be as restrained as possible given the economic slowdown in the UK and other countries, but said S4 stood out from some listed companies because of the large shareholdings held by its senior managers. “The tension will be on managers who are paid in restricted shares, options and cash bonuses.”
The US The chairman of another London-listed company looking to appoint a divisional president said it was impossible to get close to the compensation required within the UK salary cap. This is a big problem because North America is our fastest growing and largest region.”
The chairman of another company similarly complained that even though most of his competition was in North America, his senior leaders were paid “the equivalent of a regional manager in Oklahoma.”
Analysis by PwC found that pay in the FTSE 100 for the 2022 AGM season was above pre-pandemic levels in most sectors, and was at a more than five-year high overall, with average chief executive pay rising by more than a quarter a year. on the year.
Payouts have been boosted by bumper bonuses, which are around 85 per cent of the maximum payout, significantly above the normal pre-Covid payout levels of 70-75 per cent.
Caroline Le Meux, global head of ESG research, engagement and polling at Amundi, Europe’s largest asset manager, said: “The pay of UK-based chief executives can be higher than their counterparts in continental Europe. High inflation and the cost of living crisis will make the acceptability of very high salaries more difficult.
She added that “the living wage will be the most important thing in the UK this season”.
The International Labor Organization said this week that global wages fell in real terms for the first time this year since the comparative record began.
“We want to know what companies are doing to support low-wage workers,” said Tim Goodman, head of corporate governance at Schroders, pointing to initiatives such as one-off bonuses, pre-payday financial assistance or free supermarket food. draws to employees.
PwC predicted that shareholders will scrutinize executive pay increases more closely for 2023, even if they are aligned with larger workforces, although this will still lead to a higher financial impact. It said companies would need to justify any “windfall” benefits to executives where they experienced a significant increase in share price that was not due to management actions.
The Investment Association, which represents the fund management industry, has also called for controls on the pay packets of senior leaders at FTSE companies.
Investors said executive pay in sectors such as retail and hospitality – which have large, underpaid workforces – and energy are likely to come under particular scrutiny.
Buoyed by persistently high energy prices following Russia’s invasion of Ukraine in February, BP and Shell posted historic profits. This comes as pressure is mounting on the government to increase windfall taxes on oil and gas companies, due to rising energy bills for households.
“Managing upstream energy companies whose returns are linked to profits can be expected to have a good year,” said Andy Howard, global head of sustainable investing at Schroders. “But this was driven by external events such as the war in Ukraine rather than corporate strategy and so boards should be sensitive to this.”
The UK Prime Minister has also been drawn into an increasingly politically charged debate. Speaking at the G20 summit in Indonesia, Rishi Sunak said officials “must adopt pay restraint at a time like this and make sure they look after all their workers as well”.
Sir John Parker, chairman of Laing O’Rourke, argued that Sunac “is well-suited to have the support of all those privileged to lead, given where our economy is. Moderation is called for.”
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