Remuneration rolls back into question for this year’s AGM season

Remuneration rolls back into question for this year’s AGM season

Rolls-Royce Holdings plc (Rolls-Royce) revealed on 31 March 2021 that a new remuneration policy will be put to a vote at its 2021 AGM on 13 May 2021. Whilst under the remuneration policy, chief executive (CEO), Warren East’s base salary remains at £943,500, and chief financial officer, Panos Kakoullis at £680,000, 30% of East’s base salary and 20% for Kakoullis will be deferred into shares for two years.

This has come about following a turbulent year caused by the COVID-19 pandemic, which led to flight restrictions and site closures, and has greatly affected the sector in which Rolls-Royce operates, dominating the market for large commercial jets. Whilst its defence unit remained resilient, the company reported in its 2020 full year results that its civil aerospace sector was the most impacted, with revenue down by 37%. Rolls-Royce stated: ‘The impact of the COVID-19 pandemic on the Group was felt most acutely by our Civil Aerospace business. In response, we took immediate actions to address our cost base, launching the largest restructuring in our recent history, consolidating our global manufacturing footprint and delivering significant cost reduction measures.’ This resulted in a reduction of approximately 7,000 roles at the end of 2020, which is expected to rise to at least 9,000 roles. Also in 2020, in an attempt to regain financial strength, the company faced a heavily discounted £2bn rights issue, offering shareholders 10 shares at 32p each for every three they owned, representing a 41% discount. Leading advisers chose to cut back their underwriting commitments with concerns surrounding the pandemic and market volatility linked to the US election. For more information, see: Rolls-Royce taps shareholders for £2bn rescue.

Now shareholders will be faced with voting on an uncommon share payment scheme of 30% of the CEO’s base salary. Shareholders will also have to consider other elements of the remuneration policy including a reduction in the maximum incentive level from 200% of target to 175%, no long-term investment plan for the duration of the remuneration policy and an immediate reduction in pension contributions for directors to 12% of salary to align with the wider workforce.

BAE Systems plc (BAE Systems), another company operating in the aerospace sector, will also see its remuneration policy put to a vote at its 2021 AGM, to be held on 6 May 2021. BAE Systems shareholders face a very different situation, having confronted the pandemic with a resilient business plan. The company notably focussed its attention on two main areas, the acquisition of two US based companies, The Military Global Positioning System and Airborne Tactical Radios as well as injecting payments into its UK pension scheme. BAE Systems saw the acquisitions as ‘strategically attractive’ complementing its Electronic Systems portfolio and represented ‘unique opportunities to purchase high-quality, technology-based businesses with market-leading capabilities...’ As a result, the company has seen great success, which has been reflected in its remuneration report. CEO,  Charles Woodburn, saw two salary increases: 3.21% with effect from 1 December 2020 and a further 9.5% increase with effect from 1 January 2021 giving a total base salary of £1,107,538 in addition to a performance share award granted in 2018, which will vest in full with the shares being receivable in 2023. This was justified on the basis of the salary ‘being in line with median market levels for a FTSE 50 Chief Executive’ and to incentivise Woodburn to remain in his role.

Rolls-Royce has also looked to technology to fuel up its business strength, with its notable increased investment in Power Systems, one of four core parts of its business less affected by the pandemic, which has enabled the company to marry its expertise as a leading industrial technology company with sustainable energy. The company, much like BAE Systems, acquired two businesses Kinolt Group and Qinous in a bid to strengthen this side of its business. In a climate where ESG is proving to be increasingly important, the company anticipates a quick recovery for Power Systems, with its potential of becoming a leader in low carbon power solutions. So far, the success of this strategy is yet to come to fruition, but Rolls-Royce remain confident, stating ‘We continue to invest in developing market-leading technology and low carbon opportunities in all our end markets, to create value for our stakeholders and ensure we are well positioned to take advantage of the transition to a lower carbon economy and growing demand for more sustainable power solutions.’ In the meantime, the remuneration strategy reflects the unprecedented past year, and the results of this year’s AGM will indicate shareholder opinion on how well Roll-Royce has dealt with the uncertainty.






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