Executive remuneration: a period of transition

Background

Over the past two AGM seasons the nature of the conversations regarding FTSE executive pay has shifted and this has resulted in some notable market developments. In 2023, various stakeholders including the Capital Markets Industry Taskforce (CMIT) highlighted the lack of a level playing field in relation to governance of executive remuneration. This was seen by many to be limiting the ability of UK businesses to recruit and retain talent, which in turn was impacting the overall competitiveness of the UK market. 

Over the past decade there has been little variation in market practice in FTSE executive pay with c.90% of the market operating very similar pay structures. Making changes to pay was often difficult and many remuneration committees were reluctant to risk lower votes on remuneration resolutions because of the knock-on shareholder and reputational impact. 

Across the various calls for reform on remuneration, there were two consistent themes: (i) a need for there to be more flexibility for companies to design pay arrangements that better suit their specific business and talent strategies; and (ii) a need for there to be more trust between companies and shareholders on pay.

During the 2024 AGM season, there were examples of large global FTSE listed businesses increasing incentive opportunities to better reflect the international talent market in which they operate. We also saw two companies adopting a ‘hybrid’ LTIP structure, where performance shares awards are granted alongside shares with time-based vesting only. This hybrid model represents mainstream practice in the US, but was historically uncommon in the UK due to investor pushback. After seeing many of these proposals approved in 2024, there was optimism that this represented ‘green shoots’ for change towards a more flexible and open environment. 

In October 2024 the Investment Association (IA) published their revised Principles on Executive Remuneration. The IA has a significant role in influencing best practice in the UK market and the new principles were seen as an important signal that shareholders were adopting a more open stance.

The 2025 AGM season

The pace of change further accelerated during the 2025 AGM season. Around 40% of FTSE 100 companies submitted a new policy to shareholders, of which c.30% were companies who had opted to ‘go early’ (i.e. before they were required under the regulations) indicating a pent-up demand to do something different. Of the new policies put forward during the season, nearly half made significant change to either structure and / or quantum.

There were broadly four developments in FTSE 100 practice over the past year.

Firstly, a number of companies with large global footprints, opted to increase quantum, particularly long-term incentive opportunities. Companies argued that they needed to pay more to compete for international talent, particularly out of the US which remains a premium, but highly relevant, pay market. Shareholders demonstrated support for many of these quantum increases. This is in contrast to the position from only two-to-three years ago, when similar proposals would have received material push-back. There does however remain a line - proxies and shareholders remained unsupportive in relation to certain proposals where quantum increases were considered ‘too much’.

Secondly, there has been further examples of hybrid LTIPs, with five more plans being introduced in the FTSE 100. Again, companies have been arguing that paying in this hybrid format is required when competing for talent in the US market.

Thirdly, there has been greater flexibility on certain elements of best practice, with some companies opting to scale back or remove the deferral of bonuses into shares once shareholding guidelines had been met, and executives are already significantly aligned with shareholders.

Finally, there appeared to be a more flexible stance on salary increases from investors. Historically making material salary increases was challenging and investor pushback on such proposals was common. Over the last few AGM seasons we have seen more example of FTSE 100 CEO’s receiving salary increases in excess of 10%, with the majority of these increases being supported by proxies and shareholders.

Alongside these changes we have also seen greater acceptance from Boards that it is not always possible to receive a near unanimous shareholder support for pay proposals. Committees are increasingly aware that there are divergent views on pay and are therefore willing to accept lower levels of support where they believe that proposals best support the business. 

Overall, this direction of travel represents a significant step forward towards a more open environment where companies have greater flexibility to design pay arrangements which better suit their commercial circumstances and business strategies.
 

Areas for further change

Notwithstanding the significant changes we have observed over the last two years, frustrations remain between committees and shareholders and there are areas where further change could be helpful. 

The first area relates to the use of discretion. Companies often use downward discretion to adjust pay outcomes where the formulaic outcome is not considered to reflect performance in the round, but positive discretion is more rarely used and shareholder responses to this are mixed. In an increasingly volatile and uncertain world target setting for incentives is often highly challenging. In this context, there is arguably a need for companies to have greater flexibility to review outcomes at the end of the period and change these either upwards or downwards where they are not considered to appropriately reflect underlying strategic progress and performance. 

The second area of frustration relates to pay structures. While it is positive that we are seeing more hybrid LTIPs in the market, shareholder willingness to consider these alternative pay models continues to be limited to very specific circumstances, most notably when companies are competing for talent in the US. In reality a broader range of companies would benefit from the flexibility to be more innovative around pay structures to reflect their specific business and talent needs.

Reflections

Ultimately some of the challenges we have seen in the UK market come down to an ongoing lack of trust between companies and shareholders over executive pay decisions. Changing this position requires a shift from both companies and shareholders. 

From a company perspective, balanced consistent decision making is critical, with transparent and full explanations to shareholders. We have seen progress on disclosure this year, which many shareholders have welcomed. Companies need to continue to be fulsome in setting out the reasons why proposals are right for them in their specific circumstances. Committees also need to adopt an open approach to investor consultation and evolve proposals where appropriate. Finally, boards need to clearly hold executives to account where performance is not delivered and demonstrate this to shareholders in the decisions taken on pay.

In response, companies ask shareholders to consider proposals on a case by case rather than applying blanket principles or rules. This requires shareholders to give time to consultation and engage with the explanations from companies. Companies also place value on being provided with direct feedback on proposals so that they can make informed judgements on whether changes to proposals are required. Finally, there could be circumstances where shareholders could judge proposals on the ‘way out’ rather than the ‘way in’, for example, providing support upfront but pushing back at the time of vesting if the outcomes do not feel fair.

We are in a period of transition in the UK executive pay market and progress so far has been encouraging. Many shareholders have already demonstrated a greater willingness to take a more pragmatic approach and proxy agencies are also shifting in response to this evolving landscape. We hope to see further progress towards a more flexible and open environment on executive pay, which should help companies to recruit and retain the right talent and in turn support UK competitiveness on the global stage.

For regular updates on recent developments and related areas, you can join our mailing list by contacting: UKExecutiveCompensationConsulting@deloitte.co.uk