Roula Khalaf, the Editor of the Financial Times, curates her favorite stories in this informative weekly newsletter. A notable trend has emerged among FTSE 100 companies, with many now striving to significantly increase executive pay while accelerating the review periods for these compensation packages. This move appears to be a strategic response to the heightened competition with their U.S. counterparts, particularly as global businesses seek to maintain their competitive edge.

A recent report conducted by the consultancy firm Deloitte reveals that out of the 55 FTSE 100 companies that have published their annual reports for the fiscal year 2024, 24 companies are actively seeking shareholder approval for new pay policies. This is a marked increase compared to just 16 companies at the same stage last year, indicating a significant shift in the approach to executive compensation.

Among the 24 companies proposing changes to their pay policies, 13 are aiming to ‘significantly increase incentive levels’ or are advocating for more ‘innovative’ pay structures. These structures often involve a combination of performance-related bonuses, restricted share awards, and increased long-term incentives. This data shows a considerable rise from just nine companies that sought similar changes a year ago.

Mitul Shah, a partner in Deloitte’s executive remuneration and reward practice, commented, “We started to see this trend last year, with companies making their pay packages globally competitive, and this has now accelerated.” Shah highlighted that the competition to attract and retain top talent has intensified, necessitating these changes in compensation strategies.

Interestingly, among the companies proposing pay changes, ten are putting forward new pay policies ahead of the customary shareholder review period, which typically occurs every three years. This figure represents a substantial increase from the mere three companies that took similar action a year prior, underscoring the mounting pressure they are facing to revise their pay structures.

Historically, U.S. companies have offered substantially higher executive compensation packages than their UK counterparts, encompassing base salaries, bonuses, stock awards, and performance-related incentives. In recent years, this disparity has raised concerns regarding the competitiveness of UK firms, particularly as high levels of executive pay continue to attract public and political scrutiny, especially against the backdrop of rising cost-of-living challenges.

Shah pointed out that the companies that tend to publish their annual reports earlier are typically the largest global players. FTSE 100 companies with considerable global operations, especially those with U.S. divisions or facing aggressive American rivals, experience the most pressure to align their pay levels with those in the United States.

Although shareholder backlash over executive pay has historically constrained UK boards, there appears to be a recent shift in tone from investors. Many are now more willing to engage with companies on a case-by-case basis, which could signal a more open attitude towards reviewing pay structures.

“It’s not about giving companies a blank cheque but just that investor sentiment is more open to reviewing pay,” Shah explained. “If the rationale is strong enough, then companies will receive favorable votes.” This shift in investor engagement is crucial as it reflects a changing landscape in how executive pay is perceived.

Recent successes, such as those at the London Stock Exchange Group and Smith & Nephew, which managed to secure shareholder backing for multi-million-pound executive pay increases last year, have emboldened more FTSE 100 companies to pursue higher compensation packages for their leaders. British American Tobacco and Compass Group, both of which rank among the top 15 companies on the London Stock Exchange by market capitalization, are the latest firms to propose elevated pay packages for their chief executives.

Additionally, the recent repeal of the EU bonus cap appears to be motivating banks like Barclays, HSBC, and Standard Chartered to seek shareholder approval for augmented payouts tied to performance metrics for their CEOs.

Investors and advisors have noted that there is also a growing demand for competitive compensation for management roles below the level of CEO, emphasizing the need to attract and retain talent across all levels of the organization.

According to Deloitte’s data, the median FTSE 100 CEO package for 2024 has seen an increase of 7 percent, rising from £4.49 million in 2023 to £4.79 million in the current year, illustrating the broader trend towards higher executive compensation.