We are now through the bulk of the first season in which directors' pay policies have been put to a binding shareholder vote. We thought this an opportune time to take stock of the reactions of the market and others and draw out some of the themes to which we think companies may need to return as those reactions are digested.

It is becoming clear that executive remuneration is firmly back on the radar screen. After a quiet 2013 (following the turbulence of the so-called "shareholder spring" in 2012), a number of companies have suffered "significant" levels of shareholder protest. In this context, a 20% vote against a DRR is regarded by the GC 100 and Investor Group Guidance as a significant protest, but there are examples of companies receiving votes against at below this level which have also given rise to adverse media comment.

We have set out below some high-profile examples of companies that, while receiving approval for their DRRs from shareholders, have suffered significant votes against either their implementation or policy report.

Implementation report

Companies that have suffered significant votes against the backwards-looking implementation reports include:

  • AstraZeneca (61.5% voted in favour);
  • Barclays (76% voted in favour);
  • BG Group (67.2% voted in favour);
  • Carnival (58.6% voted in favour);
  • ITV (77.5% voted in favour);
  • Pearson (65.8% voted in favour); and
  • Reckitt Benckiser (68.5% voted in favour).

Some other votes on implementation reports worth noting include BP (with 83.9% voting in favour), Coca Cola HBC (with 85.9% voting in favour), HSBC (with 84% voting in favour), Lloyds Banking Group (with 87.3% voting in favour) and WPP (with 81.8% voting in favour).

Policy report

Companies that have suffered significant votes against their forward-looking policy reports include:

  • Carnival (61.9% voted in favour);
  • HSBC (79.04% voted in favour);
  • Melrose Industries (77.4% voted in favour);
  • Petrofac (77.5% voted in favour);
  • Standard Chartered (59.2% voted in favour); and
  • William Morrison (73.5% voted in favour).

Some other votes on policy reports worth noting include Amec (with 81.3% voting in favour), AstraZeneca (with 85% voting in favour), Coca Cola HBC (with 81.5% voting in favour), Reckitt Benckiser (with 80.2% voting in favour) and WPP (with 81.9% voting in favour).


When analysing some of the published DRRs, together with the votes cast for and against such reports, the following key themes have emerged:

  1. Voting outcomes

Whereas in previous years shareholders were able to send a message to remuneration committees by voting against the entire remuneration report (which was non-binding and therefore symbolic), they now have a choice of voting against the implementation report (which remains non-binding) but also against the policy report (which is binding).

Whilst no UK companies have had their remuneration policies voted down this year, for those companies whose implementation reports were not received so favourably this year, there could be adverse consequences next year if shareholders continue to object to the way in which the policy is implemented. Any company whose implementation report does not get passed next year will need to go back to their shareholders to get their policy re-approved the year after (even if their policy reports were comfortably approved this year).

Some institutional shareholders may have been relatively benign this year given that it was the first year of the new regime and most would not have wanted a remuneration policy vote to fail and this may not continue to be the case.

Next year's implementation reports will need to include a summary of the reasons for any significant votes against (as far as known to the directors), as well as any actions taken by the directors in response to those concerns. There will, therefore, be plenty of work to be done, including consulting with shareholders who have publicly voiced concerns in order to demonstrate that the company dealt with shareholder concerns.

It may only be a matter of time before a binding remuneration policy report is voted down. The first (and so far only) remuneration policy vote to be lost this year was that of Kentz (where only 42.4% of shareholders voted for the remuneration policy). As Kentz is a Jersey incorporated company, the vote was not technically required as a binding vote. Although Kentz has announced that its remuneration committee has begun consultations with shareholders and will put "the revised Remuneration Policy forward for another vote in due course", Kentz is now subject to a takeover bid so may not ultimately put the policy to a vote again.

  1. Some reactions to the first "new style" remuneration reports

Interestingly, some of the better reports from a compliance perspective have not received the highest levels of shareholder support. There are examples where both the spirit and the text of the regulations have been complied with but shareholder support was not as high as might have been expected. A likely reason for this is that shareholders have a different set of priorities to the government (BIS). By voting against or abstaining, shareholders are criticising the substantive historic pay practices at companies or future policy issues. In contrast, compliance with detailed and prescriptive disclosure requirements is seen by BIS as the bedrock for controlling executive pay.

In terms of BIS, Vince Cable has fired a shot across the bows, warning in March 2014 that if companies fail to follow the "spirit" of the executive remuneration reforms, further measures may be introduced. In a letter to FTSE 100 Remuneration Committee Chairmen, he stated that "concerns have been raised that some companies are not observing the spirit, as well as the letter, of the new reporting regulations. And there are signs that some companies continue to consider pay awards which appear excessive in light of recent performance".

This letter followed an earlier widely-reported speech to an audience of Remuneration Committee chairs in which Vince Cable said that, among other things, he would consider changing the rules to provide "stricter regulatory oversight of pay reports and policies", to require shareholders to disclose how they vote on pay resolutions at a company's AGM and to require companies to consult employees on remuneration issues.

The High Pay Centre has focused on the issue of comparison with employee pay. Together with a number of other organisations including the Local Authority Pension Fund and PIRC, they wrote to the FRC expressing concerns that companies have failed to comply with the disclosure regulations. In particular, they are concerned that many companies are failing to properly explain how they take the pay of the wider workforce into consideration when setting executive pay.

  1. Do policy reports include a maximum?

The requirement to state the maximum for each component of remuneration has been tackled in different ways by companies. At one end of the spectrum compliance is ensured by including either a fixed number, being higher than current base salary, or a maximum percentage increase (which could include an increase by reference to inflation). At the other end of the spectrum, simply listing the factors which are taken into account in setting increases, but with flexibility to cater for exceptional circumstances (and without a cap) would not be compliant.

Surprisingly, some companies have ignored the requirement to set a maximum, with some simply stating that they have no maximum. Most companies have however done so (including a number who have set a hard figure on the maximum amount of salary that can be paid).

  1. Clarification statements

An interesting development has been the use of website clarifications. Where shareholders have been unhappy with remuneration policies, website clarifications have been the order of the day. Over 30 companies have been required by shareholders to clarify how they would operate their policy in practice, especially in relation to recruitment awards and also how they would exercise discretions in exceptional circumstances: click here for our detailed analysis.

  1. European developments – revisions to the Shareholder Rights Directive

The European Commission has announced proposals relating to remuneration as part of revisions to the Shareholder Rights Directive. If introduced, the proposals will see all EU listed companies' remuneration policies being subject to a binding shareholder vote every three years, with payments in breach of a shareholder approved policy being prohibited, together with implementation reports being subject to a separate shareholder vote. This very much follows the current position for UK listed companies.

One area where the proposed EU rules would be more onerous than the UK regime is to require the inclusion of a ratio between the directors’ average remuneration and the full time employees’ average remuneration which will be mandatory other than in “exceptional circumstances”.

The Commission proposals do not include a cap on maximum pay but it will be interesting to see if further political pressures will be brought to bear, mirroring what has been seen in the financial services sector with the cap on bankers' bonuses.

  1. The road ahead?

Executive pay will remain under close, and probably even greater, scrutiny.

Remuneration and incentives, particularly for directors and senior managers are an ever increasing focus for government, regulators and the media. Shareholders, armed with more power as a result of the new binding vote on companies' policy reports, are likely to increasingly utilise their new voting rights to bring remuneration policies into line. This means that companies will need to be more proactive when engaging with shareholders to ensure that their remuneration policies receive high levels of support.