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Farient’s Top Five Predictions for 2025
January 20, 2025
The executive remuneration landscape in the UK is changing. Over the last 12 months, we have seen greater willingness among companies, shareholders, and proxy advisors to move away from a ‘one size fits all’ to a more pragmatic, flexible, and tailored approach. Our view is that this is a necessary change to allow UK companies to compete globally for top talent.
Against this backdrop, the following are Farient’s top five remuneration-related predictions for 2025.
Increased focus on commercially led decision-making
Historically, Remuneration Committees have been heavily influenced by the governance environment when making decisions, resulting in relatively uniform executive pay arrangements across the UK. For example, 75% of companies in the FTSE 350 adopt a deferred annual bonus and a performance-based share plan with a three-year performance period and a two-year holding period.
Even where alternative structures are used such as restricted share schemes, these have generally followed set parameters and provided limited differentiation across the market.
As the market moves to a more pragmatic and flexible approach, we predict that Remuneration Committees will increasingly look to more bespoke approaches that effectively address the challenges and circumstances of the company – with the focus being on what works commercially rather than following the ‘best practice’ governance-friendly features.
The key factor in gaining support from shareholders when adopting a more bespoke approach is to ensure the rationale is thoughtful, accurately reflects the strategic challenges of the company, and is well communicated.
Hybrid incentive plans
Hybrid is the future. It is an approach that provides upside potential whilst still having a safety net in challenging environments – whether that relates to the lows for cyclical companies or to protect all companies in industry specific and/or wider economic downturns. With this safety net, Performance Share Plans can be genuinely performance based and reward outperformance with no need to consider other aspects like retention.
Our view is that hybrid plans will become the new gold standard incentive schemes eventually adopted by the majority of the UK market – as is the case in the US where over two thirds of the S&P 500 currently adopt a hybrid approach for their named executives.
We predict that hybrid incentive plans will be on the agenda of many Remuneration Committees when undertaking their next Policy review. Given the limited market practice, those companies that adopt hybrid plans will be seen as ‘innovators’. Inevitably, these will lead to lower votes initially as more conservative shareholders and proxy agencies struggle with this evolution to a new model.
Given the prevalence of hybrid plans in the US, we expect many early adopters to have significant presence in the US and/or compete for talent in the US market as this provides a compelling rationale for the change. However, as more companies adopt hybrid plans, we predict that their use will become more widespread across UK-only companies.
Shareholders and the governance environment
While most shareholders are increasingly aware of the need for change regulators and legislators need to adapt also.
In the UK, there are a series of governance-mandated features (e.g., bonus deferral, two-year post-vesting holding period, post-employment shareholding guidelines) that, when applied together, have been a key contributor to UK pay arrangements being less competitive on the global stage.
We have already seen some relaxation of these features – such as companies removing bonus deferral for an executive once the shareholding guidelines have been met – but our view is that there should be more. This could include:
- Removal of post-employment shareholding guidelines
- Relaxation of the two-year holding period – e.g., allowing for a phased release of vested LTIP awards in years four and five following the grant of awards
- Removal of the requirement to record companies that have a shareholder vote below 80%
These changes would need to be considered alongside a review of the UK Corporate Governance Code to ensure that it provides for sufficient flexibility for companies to adopt remuneration arrangements aligned to their circumstances and strategies.
Quantum
Together with the structure of remuneration arrangements, quantum is a key factor in considering the competitiveness of remuneration arrangements.
Overall quantum in the UK has stayed relatively flat in recent years, further widening the gap when competing for top talent in the US and private markets.
To restore competitiveness, a correction is needed in the quantum offered by UK companies to executives and non-executive directors. This will likely require one-off corrections in many companies.
Contentious AGM season
As companies increasingly look to implement the changes detailed above, we predict a more challenging AGM season will emerge as proxy agencies and shareholders adapt to the new ‘normal’.
Whilst there is more apparent willingness from shareholders and proxy agencies to support these bespoke arrangements, we predict there will still be a higher number of low or lost votes (in 2024, 11% of the FTSE 350 attracted votes below 80%). However, we believe Remuneration Committees will increasingly accept lower voting outcomes to do the right thing for the company.
Farient’s approach
Independent advisors play a vital role in helping Remuneration Committees navigate the executive remuneration environment, providing invaluable insights required to effectively shape or reshape remuneration proposals.
As the environment continues to change, so must advisors. The historic compliance-led approach is no longer fit for purpose as it results in uniform arrangements that ignore the factors specific to each company.
Farient’s approach is to consider what works best for each company by carefully considering its strategy, challenges, and future ambitions. This allows us to provide a fresh perspective, informed first and foremost by the commercial requirements.
Should you wish to discuss our predictions or your specific circumstances, please contact either myself (stephen.cahill@farient.com) or David Cohen (david.cohen@farient.com).
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