With the crocuses yet to bloom, a row over executive pay ahead of Imperial Brands plc’s February 1 annual general meeting may be the first sign that spring is coming – and with it, proxy season. On Thursday, the FTSE 100 tobacconist bowed to shareholder pressure and withdrew a resolution seeking approval of its revised remuneration policy from the AGM agenda.

saffron crocus first spring flower closeup

UK issuers are required to receive binding shareholder approval of their remuneration policy at least every three years, or if changes are made. Having passed its existing policy in 2015, Imperial has a year to go; the proposal had been submitted to incorporate the following changes:

  • increase executives’ maximum long-term incentive payout by 100% of salary (from 350% to 450% of salary for the CEO, and from 200% to 300% for other executives)
  • introduce cash conversion as a long-term incentive metric (alongside earnings per share and total shareholder return);
  • increase the maximum EPS target from 8% to 9% annual growth;
  • increase the CEO’s shareholding requirement from 300% to 400% of salary; and
  • introduce a new requirement that the CEO continue to hold shares worth at least 100% of salary for two years after departing.

With the proposal now withdrawn, the existing policy will remain in place.

The board’s retreat is particularly noteworthy given that most UK issuers will be seeking re-approval of their own remuneration policies during 2017. Being first out the gate with one’s AGM materials can be risky business: You step onto the road, and if you don’t keep your feet, there’s no knowing where you might be swept off to (just ask Dame Ann Dowling). Perhaps unrelatedly, a number of the UK’s largest companies will this year hold their AGMs in May, rather than April.

The triennial return of binding votes on the sensitive topic of executive pay has boosted the level of engagement between issuers and their shareholders in recent months, as remuneration committees look to forestall potential opposition. However, Imperial’s decision to withdraw the proposed policy indicates that simply involving investors in the process at an early stage may not be enough to generate support if their concerns are not adequately addressed.

In this case, the board had conducted a consultation whilst shaping the revised policy and even included certain features that were requested by investors, such as a post-exit shareholding requirement for the CEO and a broader range of performance metrics. It appears that these structural improvements were not sufficient to offset concerns regarding the increase in quantum pay opportunity.

In announcing the withdrawal, Imperial’s chairman, Mark Williamson, stated that the board had “been engaging with shareholders for some time and while we received considerable support, it is clear that views have changed over that time.”

The change in views may reflect growing concern regarding corporate excess from a variety of stakeholders and the broader public. Prime Minister Theresa May’s leadership bid was based in part on pledges to tackle the issue and, after her government’s Green Paper raised concerns of reform getting watered down, this week she received a joint letter from ICSA, ICGN, the Institute of Directors and the Trades Union Congress urging the government to remain firmly committed to addressing governance and pay. Late last year BlackRock told the British parliament that it would take a harder line on remuneration, and earlier this month the asset manager sent a letter to FTSE 350 chairmen indicating that benchmarking “should only be used as a frame of reference for what competitors are paying, rather than as a starting point for negotiations,” and that any “significant pay increase that is out of line with the rest of the workforce” should be accompanied by a cogent rationale.

For many years, the conversation about UK executive pay has focused on structural features such as deferral, shareholding requirements, extended performance periods and clawback provisions, which seek to improve alignment with company performance and shareholder experience. High pay opportunities were justified on the basis that actual payouts would reflect returns, with the robust incentive structure precluding rewards for failure. With these features now widespread, the emphasis appears to be shifting towards simplicity and restraint.

It’s too early to tell if the Imperial withdrawal will set the tone for the coming UK proxy season, or merely serve as an outlier. However, it should be noted that Imperial had avoided particularly high opposition levels on recent pay votes, and took the best practice approach of consulting with shareholders whilst crafting the revised policy. As such, remuneration committees at the hundreds of other UK issuers set to submit binding policy votes in the next few months may want to check in with their top 20 shareholders one last time.