City & Financial Global Remuneration Summit

28 March 2023 - London

In late March Rem.n was a main sponsor of and speaker at the City Remuneration Summit 2023.

This event, now in its 16th year, focuses exclusively on FCA regulated firms. It is very much the premium gathering of firms from ‘The City’, with speakers from the Bank of England and leading financial institutions. The focus this year was primarily on the removal of the cap on bankers’ bonuses, following the Edinburgh reforms - one of the issues at the top of the agenda for Heads of Reward managing incentive compensation in financial institutions across the UK.

It was a timely conference – just when it looked as though the City was ready for a boost to growth and loosening of regulations from the Government’s proposals, little did the organisers or attendees expect that in the two weeks leading up to the conference, the banking world would receive such a shuddering jolt in the demise of SVB and Signature Bank, along with the takeover of Credit Suisse – an uneasy reminder of why good corporate governance is necessary.

But were the proposed changes a little too late? Speeches were rapidly edited and updated in the last few weeks. Most considered (hoped?) that what just happened wasn’t indicative of a wider banking meltdown, but it did make the content of our own speech: “How important are changes to incentive pay (in financial services) when it comes to changing our world?” all the more relevant.

Uncapping bonus means you get what you pay for, but getting what you pay for isn’t necessarily the same as getting what you want. In this case, uncapping the bonus means more growth, but do we just want growth? Or do we want Responsible Growth? And what do we want it to look like between now and 2050? Accepting that growth can no longer come at the expense of the planet means facing some hard truths. Fundamentally, somebody, somewhere, has to pay for it.

It's true that incentives can be part of the solution….if they’re properly designed. But good performance isn’t easy to define and even harder to measure, and that was before Environmental, Social and Governance (or “ESG”) measures were introduced into incentives.

Let’s take a look at some statistics that demonstrate just how far the debate on inclusion of ESG in the metrics of incentive plans has developed:`

• c70% of FTSE 100 companies include ESG metrics in their annual bonus plans ¹
• c45% of FTSE 100 companies use ESG metrics under long-term incentive plans ¹
• 82% of senior executives globally have ESG targets in their pay ²
• More than 75% of Europe’s largest companies include some form of carbon target in their executive pay plans ³
• 2/3 of investors think ESG should be included in executive pay – generally with a 10-30% weighting ⁴

In August, the FRC wrote asking Remuneration Committee Chairs of Financial Services organisations to consider how, and whether, the inclusion of ESG measures in incentives can act as a” lever” to achieving net zero in their own organisations. The problem is that the more ESG in the pay metrics, the easier it can all look to shareholders.

A recent PwC/London Business School survey, “Paying for Net Zero” suggests that ESG pay-outs specifically linked to carbon targets were resulting in higher pay-out – which seems out of step with slow progress being made on climate change generally. So, what’s going on?

If companies are taking this seriously, and want to be part of the solution, then it’s really important that pay-out on an ESG metric doesn’t become an entitlement! An ESG metric needs to have teeth so that it doesn’t end up being the bit of the bonus that ends up being guaranteed.

The truth is that whilst a growing number of investors are calling for the inclusion of ESG performance in executive incentives, will they be prepared to accept what a greener world costs – to them? It’s interesting that in a 2022 PwC Global investor survey, only 27% of investors surveyed say they would be willing to accept a lower rate of return on investment in a company undertaking activities that have a beneficial impact on society or the environment.

ESG has become a politically divisive argument about how to balance competing pressures. In the U.S., it’s been claimed by some conservatives that ESG is being used by the left as a “social credit score” to force businesses and financial institutions to adopt progressive ideologies across the globe. Lawyers in Montana want to recover state funds where "corrosive 'ESG' practices "destroy shareholder value in pursuit of faddish ideological aims, often without proper disclosure to investors.” They have Blackrock in their sights, but this language is interesting(!) because not too long ago it was the case that funds demanded ESG investment from people like Blackrock! Now more than $4bn of government pension and treasury funds have been pulled from the firm by Republican state officials on the grounds that Blackrock is “boycotting” fossil fuel companies and prioritising social concerns ahead of its fiduciary duty to maximise returns for customers.

Contrast this with the CEO of Norges Bank’s Investment arm, managing the modest $1.2 trillion Norwegian Sovereign Wealth fund. He describes the politicisation of ESG as ‘worrying’. For him “ESG is not politics – it is common sense……. this is how we build wealth for future generations.”

Whatever your view, paying a CEO to make progress on ESG in their business does make them focus on it. And in the long run, getting companies to focus on ESG can be far more effective than blocking roads, or throwing paint at pictures, however well-meaning the intentions.

It’s inevitable that we may need to have lower expectations from equity returns for a while - but the trade-off is more sustainable returns and responsible growth. That’s actually not too dissimilar to when the Investment Association recognised a place for the use of Restricted Stock – if anything provides more of a guarantee it should pay less – well this is true of performance as well – if you get more of a guarantee then you get less reward – so, lower returns – at least initially.

So, to return to the question we addressed in our speech: Can incentives work to change the world for the better in Financial Services…...? It’s our view that slow and steady, sustainable growth beats volatile high growth every time. We can design incentives that pay for that, because paying for it means we’ll get it. If incentives are to play a role in responsible growth…then uncapping bonus is part of a solution and the inclusion of ESG is also part of that solution, as long as paying to hit easy ESG targets doesn’t become an entitlement.

It’s been a fairly eventful couple of weeks for the sector, so while the dust settles on some pretty stark reminders of what responsible growth does NOT look like, Remuneration Committee Chairs will be rightly concerned with how to adapt any change in the new rules for the world we now live in

One rule that won’t change is: remember to be clear on WHAT you are paying for, and WHY.

¹ Deloitte: Directors’ remuneration in FTSE 100 companies October 2022
² PwC and LBS “Paying for Good” 2022
³ PwC/LBS Paying for Net Zero 2023
⁴ PwC Global Investor Survey 2022