The authors from PwC examine details of two upcoming decisions firms' owners are taking about remuneration and incentive policies, part of our continued coverage of this area.

Chandni Bhagani and Yoni Stone from PricewaterhouseCoopers report on companies seeking shareholder approval to bring in new incentive plans and remuneration policies presented at general meetings during July 2021. 

Of the 104 meetings held, two companies are reported on below.

JD Sports Fashion plc
JD Sports Fashion plc sought approval for its new remuneration policy and long-term incentive plan at its AGM on 1 July 2021. IVIS awarded both these resolutions a “red-top”.

Under the current policy, awards of up to 250 per cent of salary can be granted under the company’s cash long-term incentive plan, with 100 per cent of the award vesting for threshold performance. Last year the performance measures were profit before tax and share price, with weightings of 60 per cent and 40 per cent respectively. This year, the sole performance measure is PBT. 

Under the company’s new policy, awards take the form of both cash and shares, noting that the share-based awards are subject to a post-vesting holding period of two years. The rationale for the revised LTIP structure is as follows:

-- It is more in line with FTSE 100 market practice;
-- It provides greater alignment between management and shareholders;
-- It ensures that management are invested in the long-term future of the business via their shareholdings; and
-- It supports succession planning.

The committee noted that in the long term, the intention is to shift from this hybrid structure to an all-share based scheme. 

For the 2020/2021 award, the executive chairman will receive a share award equivalent to 250 per cent of salary; the chief financial officer will also receive an award worth 250 per cent but with a minimum of 33 per cent paid in shares, and therefore a maximum of 67 per cent paid in cash. The share element of awards will vest after five years, whereas the cash element vests after three years if the performance measures are met. 

The following four principles will be considered when assessing performance:

1. Achieving a minimum level of PBT will result in a maximum of 67 per cent of the award vesting. If minimum is achieved then awards vest on a sliding scale based on the targets, which will be disclosed retrospectively. 

2. If (a) consistent growth targets are met in each of the three years of the performance period and (b) a minimum level of PBT is achieved (as above), then the payout of the award will be no less than the value of awards received in the previous year.

3. The share price at the start of the financial year in which the award is made will be used to calculate several notional shares. At the end of the performance period, this number of shares and the latest share price will be used to calculate the cash award value. A minimum of 33 per cent of the award is based on share price.

4. Taking into consideration points 1 to 3 above, the maximum award capable of vesting will be worth 250 per cent of salary. 

IVIS noted that the company was putting forward a new policy following a significant vote (c.33 per cent) against the policy that was voted on at the company’s 2020 AGM. Despite the move towards a hybrid structure for the LTIP, IVIS commented that granting any portion of the award in cash is not in line with best practice. Shareholders will have to be comfortable that the revised Policy does not incorporate any minimum shareholding requirements or post-cessation shareholding requirements.  

At the meeting, the remuneration policy was passed with only 79.99 per cent of votes cast in favour and 20.01 per cent of votes cast against the proposal. The long-term incentive plan was also passed with 83.43 per cent of votes cast in favour of the resolution. 

Wizz Air Holding plc
At its AGM on 27 July 2021, Wizz Air Holding plc sought approval for its new remuneration policy and their Wizz Air Value Creation Plan. IVIS awarded both the remuneration policy and Wizz Air Value Creation Plan resolutions a “red-top”.

Under the current policy, the maximum LTIP opportunity is 250 per cent of salary with vesting based entirely on total shareholder return performance compared with a bespoke peer group of European airline companies. 

The new policy increases the exceptional award limit for the LTIP to 300 per cent of salary and adjusts the performance measures to be 90 per cent based on share price and 10 per cent based on environmental, social and governance criteria. The intention is to only use the LTIP for senior executives, excluding the chief executive officer, who will participate in the value creation plan subject to its approval by shareholders. If the VCP resolution fails, then the CEO will receive awards under the LTIP. 

The Wizz Air VCP is a new plan only for the chief executive. The maximum potential payout under the plan is £100 million. As with the new long-term incentive plan, the performance measures are share price growth and ESG with weightings of 90 per cent and 10 per cent respectively, measured over a five-year performance period. The ESG measures will relate to CO2 emissions reduction and gender diversity. 40 per cent of the award will vest after five years, with the remaining 60 per cent vesting in three equal tranches at the end of years 6, 7 and 8. 
  
The rationale behind introducing the value creation plan is to align the CEO’s interests more closely with shareholders’ and incentivise substantial value creation as well as achieve ESG objectives over the next five years. It was noted that the CEO has led the business since its initial public offering in 2015 and over this period the company has grown exponentially. It is the view of the company that his continued leadership is crucial in ensuring further exponential growth in the future. 

IVIS noted that shareholders need to be satisfied with the level of quantum available to the CEO under the VCP (maximum £100 million), as well as the features of the plan, such as majority focus on share price growth. IVIS also noted that the award is not subject to time pro-rating in the case of cessation of employment. Shareholders will also need to feel comfortable with the LTIP remaining in the policy, noting that there is no intention to grant awards under the LTIP to the CEO if the VCP is approved. 

At the meeting, the remuneration policy was passed with 66.80 per cent of votes cast in favour and 33.20 per cent of votes cast against the resolution. The Wizz Air Value Creation Plan resolution also passed with 67.56 per cent of the votes cast in favour and 32.44 per cent cast against.