London. At the Standard Chartered PLC (the ‘Company’) annual general meeting (‘AGM’) on 8 May 2019, resolution four on the directors’ remuneration policy (‘policy’) received the support of 64% of shareholders. The policy is set out on pages 109 to 115 of the Group’s 2018 Annual Report (https://av.sc.com/corp-en/content/docs/annual-report-18.pdf).
The UK Corporate Governance Code requires companies to provide an update within six months of an AGM where more than 20% of shareholders have voted against a resolution. This statement provides an update on our recent shareholder engagement and the actions we are taking to address the feedback.
Following the AGM the Group’s Remuneration Committee (‘the Committee’) acknowledged that more needed to be done to understand and address the concerns raised by some shareholders on specific areas of the policy. We announced that we would continue to engage with shareholders on their concerns on the new policy in the coming months.
Update on shareholder engagement
Since the AGM, the Chair and members of the Committee and the Group Chairman engaged with shareholders that represent approximately 60% of our issued share capital, with the Investment Association that represents over 250 UK investment management firms and with other major shareholder advisory bodies. At these meetings, we listened to the range of views and concerns of shareholders, in particular to understand the current concerns on pension arrangements for incumbent executive directors. There were a broad range of views and, in reaching a conclusion, we have sought to find a reasonable solution to reconcile these different opinions and resolve concerns.
The key views expressed were:
- The majority of shareholders we engaged with support the existing overall quantum of total remuneration offered to the current executive directors in absolute terms and relative to peers. Notwithstanding this, they wish to see the concerns of other shareholders in relation to pension allowances resolved, whilst keeping the executive directors engaged and focused on the delivery of the strategy
- Where shareholders had concerns, these primarily related to the lack of alignment between pension arrangements for incumbent executive directors with the wider workforce. However, shareholders appreciated our commitment to move to a pension of 10% of salary for new executive directors in the new policy
- Notwithstanding the executive directors’ contractual entitlements, a number of shareholders expect a reduction in pension for our current executive directors
- Some shareholders expressed concerns that, while disclosure levels are generally good, the structure of salary and pension arrangements and how they align to the wider workforce and the UK Corporate Governance Code was not as clearly explained as it could have been, leading to insufficient clarity.
Changes to current executive directors’ remuneration effective 1 January 2020
The Committee considered carefully the feedback received from the engagement process, and the guidance on pensions published by the Investment Association at the end of September. The Committee reflected on the strength of stakeholders’ views on executive pensions, balanced with the principles applied to the wider workforce in similar circumstances.
Taking all of this into consideration, the Committee concluded that we should implement a change to resolve concerns as swiftly as possible, with the Board, including the executive directors, wanting to avoid any distraction from the delivery of our strategy. The contractual terms and conditions for Bill Winters and Andy Halford will change and their pension allowance will reduce from 20% of salary to 10% of salary with effect from 1 January 2020. This aligns the executive directors’ pension arrangement with UK employees of Standard Chartered from the start of 2020.
The executive directors’ salaries are paid as a mixture of cash and shares to strengthen shareholder alignment and the pension allowance is set as a percentage of salary (both the cash and shares components). This is key to the alignment of the current executive directors’ remuneration to other UK employees. Pension allowances as a percentage of only part of salary would not be aligned to the wider workforce. Salary for executive directors is set in the same way as for all employees being contractually fixed, based on the role and the skills and experience, and set and reviewed annually with reference to relevant market benchmarks. Salary conforms with the Investment Association’s guidance on the definition of base pay.
We acknowledge that paying part of salary in cash and part of salary in shares has led to some confusion. We will improve our disclosure in our next directors’ remuneration report to explain how salary is set in the same way for all employees. The changes made in 2019 to the policy align the executive directors with the changes already made in 2016 for other employees who historically received fixed pay allowances. Renewing the policy in 2019 provided the first opportunity to bring the executive directors into line with other employees in this respect. We will provide further information to explain this more clearly in our directors’ remuneration report. Allowances and salary were combined for other employees following changes to the European Banking Authority guidance which set the expectation that fixed pay allowances should reflect relevant professional experience and organisational responsibility, should not depend on performance or be revocable, and, because they are fixed pay, may be pensionable.
Impact of changes to executive director remuneration effective 1 January 2020
These changes mean that:
- Bill Winters’ pension allowance will reduce by 50% from £474,000 to £237,000 on 1 January 2020. This is 10% of salary
- Andy Halford’s pension allowance will reduce by 50% from £294,000 to £147,000 on 1 January 2020. This is 10% of salary
- 10% of salary is aligned with the pension arrangements for UK employees at Standard Chartered and the pension arrangement for any new executive director under the policy
- Fixed pay (salary plus pension allowance) for the executive directors will reduce by 8%
- Because the variable pay opportunity is a maximum of 200% of fixed pay in line with the regulatory definition, the reduction in pension allowance will result in a reduction in the variable pay opportunity for both executive directors
- As a result of the changes, the target and maximum total remuneration opportunity (fixed pay plus the variable pay opportunity) for the executive directors will reduce by 8%
- No compensation is being given to the executive directors for the reduction in their pension allowance.
Both executive directors have accepted this change.
Further information regarding remuneration arrangements
The Committee reflected on feedback provided by some shareholders on the salary structure, including some confusion around how it aligns with the rest of the workforce. The Committee will improve the disclosure in the 2019 directors’ remuneration report on the structure of salary and pension arrangements, by providing more detail on how it aligns with the wider workforce and complies with the UK Governance Code and other investor guidance.
As explained above, salary is set in the same way for all employees. There are two principal differences between salary for the executive directors relative to the wider workforce. Firstly, the executive directors receive part of their salary in shares released pro rata over five years to strengthen the alignment with shareholders’ interests and long-term value creation, whereas other employees receive all of their salary in cash with no holding period. Secondly, the broader employee population has received salary increases, on average, of 4% each year since 2015 (cumulatively approximately 20%) whereas the executive directors have received one 3% increase during that period. The Committee will continue to review annually the salary and total remuneration opportunity for the executive directors in accordance with the criteria set out in the policy.
The share-based component of salary is not variable or performance-related pay. In line with the UK Corporate Governance Code, only salary for executive directors and UK employees is pensionable. No benefits or variable pay are pensionable.
Across the Group, pension arrangements take into account local market practice, legislation and regulation in each country. To be competitive and to meet statutory requirements, pension levels differ in the 60 markets that Standard Chartered has employees in. There is therefore no single pension level for employees across the Group. Our approach is to ensure our arrangements are fair and appropriate within each country in line with the principles of our Fair Pay Charter. When the Committee considers the alignment between executive directors and the wider workforce, this is considered in respect of the arrangements in place in the UK where both executive directors are employed and based.
Until April 2019, there were a variety of pension contribution rates and allowances for employees in the UK based on tenure, age and seniority. From 1 April 2019, the pension arrangements in the UK were harmonised to 10% of salary for all employees, including new hires. Employees with a contractual entitlement to a higher pension than 10% prior to April 2019 had their pension reduced to 10% but received a protected cash allowance or an increase in salary so that their individual contractual commitment for their total level of fixed pay remained unchanged.
The policy for any new executive director and the changes being made to Bill Winters and Andy Halford’s pension allowance from 1 January 2020, bring them in line with the arrangements in place for UK employees. Whereas other employees received compensation for any pension reduction to maintain contractual commitments, the executive directors will not receive compensation for this change to their pension arrangement.
We would like to thank Bill Winters and Andy Halford for their willingness to agree to these changes. Shareholders’ feedback has been invaluable and the Board and Committee are committed to continuing their engagement and dialogue with shareholders and their representative bodies.
We will provide a final summary of the engagement conducted throughout the year, how we responded to the feedback and the changes made to the implementation of the policy in the 2019 directors’ remuneration report.