Declining AIM share values and increased stakeholder scrutiny on remuneration, coupled with the spill over of public and governance pressures in other sectors, will prompt AIM-quoted companies to re-assess the way they reward their employees and executives, according to a new report from PricewaterhouseCoopers LLP (PwC).
David Snell, AIM leader, PricewaterhouseCoopers LLP, commented:
“The AIM market is at a significant point in its 15 year history, with early signs of market recovery. With many companies still suffering from depressed share prices, finding appropriate executive incentivisation whilst managing investor sentiment will be a critical success factor for companies. Transparency in this area provided by the recent changes to the AIM Rules should encourage investors to provide much needed growth capital.”
The PwC paper, ‘AIM – the state of pay’, looks specifically at the current and forthcoming remuneration issues for the wide range of business seeking growth capital on the London Stock Exchange’s international AIM market.
Salary, bonus and long-term equity incentives
Salary levels in AIM companies vary and broadly increase in line with market capitalisation. Median salaries for chief executives (CEO) and finance directors (FD) at the lower end, with market capitalisation of less than £15m, are £157,000 and £104,000, respectively. At the top end, those with market capitalisation in excess of £200m, these figures are £320,000 and £196,000. Some of the highest AIM salaries are found within real estate and financial services sectors – which is consistent with the main market.
An executive director in an AIM company will typically participate in an annual bonus arrangement. Median maximum bonus potential is 60% for both CEOs and FDs, which is a lower level than their FTSE counterparts.
Paul Wolstenholme, reward director, PricewaterhouseCoopers LLP, commented:
“Given the current state of the AIM market, any changes to existing remuneration structures for key executives may be unpopular with stakeholders unless remuneration committees demonstrate that there is a strong business justification for them. Indeed any changes should be focussed on performance-based elements of remuneration such as bonus or equity incentives. This should also lead to a greater proportion of an individual’s remuneration package being linked to short and long-term value creation.
In addition, institutional shareholders and regulators are taking a more active involvement in governance and remuneration at AIM companies. We believe that this will lead to remuneration committees reviewing current arrangements to ensure that top performers are appropriately retained and motivated whilst ensuring that there is a clear relationship between pay and performance taking into account both the risk profile of the company and value created for shareholders.”
The primary mechanism for delivering equity incentives for AIM executives is options. This trend differs from the fully-quoted environment, which has moved to reliance on long-term incentive plans (LTIPs). Many institutional shareholders prefer the use of LTIPs as they are perceived to deliver better alignment between shareholders’ and executives’ interests.
David Snell, AIM leader, PricewaterhouseCoopers LLP, added:
“With many options now underwater and seen as worthless by executives, AIM remuneration committees may look at implementing a new share plan with better alignment. An alternative favoured by some shareholders who think the ‘pain’ should be shared by executives is to do nothing - but such an approach presents retention and incentivisation issues.”
AIM action points
To support AIM companies as they get to grips with this growing issue, PwC suggests those involved in decisions about remuneration consider the following six key points:
- Aligning executives’ reward expectations with future value creation for shareholders;
- Taking a holistic view of remuneration, which considers all elements of the package and how they incentivise behaviours and take into account appropriate levels of risk;
- Addressing the problem of underwater options (if relevant) in a fair manner, which balances the interests of all stakeholders and gives thought to potential future payouts in retaining key executives;
- Shifting to the use of stretching performance conditions which are underpinned by Company specific business strategies and demonstrate a clear link between pay and real performance
- Considering how strong governance principles can be imbedded within an organisation and demonstrated with particular reference to shareholder engagement and levels of disclosure around remuneration; and
- Remuneration committees should consider balancing the need to motivate executives in the face of increased income tax and higher earner pension taxation against shareholders’ perceptions that the link between pay and performance is not strong enough.
