Votes on remuneration - improvement catalyst or innovation blocker?

Votes on remuneration - improvement catalyst or i...

David Ellis discusses the impact of new regulations on remuneration



KPMG in the UK


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Whilst new regulations give shareholders stronger voting powers on remuneration, I believe they’re also risking stifling innovation on linking pay and incentives to performance and long-term strategic objectives. 

A lack of alignment – real or perceived – between executives’ reward and company performance remains a major concern, for investors and society at large. It is a recurrent issue, but with the implementation of the new directors’ remuneration reporting regulations, shareholders now have enhanced voting powers. Evidence from the 2014 annual general meeting (AGM) season indicates the new regulations are already having an impact. Votes against are on the rise – albeit from a low base – and a KPMG analysis suggests the performance/pay linkage is a key focus for discontent.

New regime

The new regulations require quoted companies (excluding those listed on London Stock Exchange sub-market AIM) to obtain shareholder approval for their remuneration policy. They also require a separate annual remuneration report, detailing how policies have been put into practice. Shareholders have an advisory vote on the annual remuneration report and a binding report on policy.

The biggest impact so far in 2014 has been in the FTSE-100. In 2013, around 2.5 percent of leading quoted companies experienced a significant shareholder vote against their remuneration reports (significant defined as 20 percent or more). So far this year, that figure has risen to 12 percent. Meanwhile, nearly 8 percent of FTSE 100 companies have seen a significant vote against their remuneration policy.

Across the FTSE All-Share index, significant votes against remuneration reports currently stand at about 10 percent of companies., This represents a marginal increase over 2013 as a whole, and small cap companies have seen an improvement. The number of small cap companies with a significant vote against is less than 5 percent, compared to 10 percent in 2013 as a whole, and a half year peak of 20 percent. This suggests to us that these companies have worked hard in the last 12 months to improve the structure, disclosure and communication of their remuneration.

Trigger points

KPMG's analysis of 2014 voting up to the end of May provided the central theme for our latest Remuneration Forum event, held in June. As noted at the event, shareholders’ main concerns include lack of disclosure transparency, bonus payments based on less-than-stretching targets and significant base pay increases. Concern over use of discretion was also a trigger for ‘no’ votes. For most companies with a significant vote against, this reflected a number of issues of concern for shareholders rather than a single issue. However, the issues themselves are not new, and should not really have come as a surprise to companies.

Better policy

Based on our discussions with clients, there is often concern that incentive schemes for executives are mis-aligned with the interests of long-term shareholders. The diversity of shareholders and their objectives makes this task even more difficult.

In theory, the new rules should help to focus remuneration committees on implementing more effective policies. However, there could be unintended consequences, not least that too much focus on pay - fuelled by media and political interest - could distract attention from long-term strategy..Equally important, when faced with the prospect of binding votes, remuneration committees might well be inclined to be cautious and this could stifle innovation.

As such, I believe the new rules present a real challenge for remuneration committees. All committees are striving to align executives and shareholders’ expectations, but increasingly, they’re working in a regulatory environment where the possibility of a binding "no" must inevitably colour their thinking. The desire for caution and acceptance may outweigh the desire to fully link pay to strategy and performance if this means adopting an innovative approach. 

The next Remuneration Forum will take place on Wednesday 1 October 2014 at KPMG’s Salisbury Square office (PDF 151.56 KB) from 4:30pm onwards. Register your attendance by sending us an email at

This article represents the views of the author only, and does not necessarily represent the views or professional advice of KPMG in the UK.

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