Revised Investment Association Remuneration Guidelines
Its update is timed so that companies can react to current thinking in time for 2017 when most listed companies are again putting forward binding remuneration policies to their shareholders, their 2014 policies coming to the end of their 3 year life. It also follows an Investment Association working group (Working Group) final report, which in the summer recommended significant changes to current remuneration practice (see our Law-Now on the Working Group recommendation).
The revised Guidelines reflect the Working Group’s specific recommendations, though its core pleas for flexibility and simplicity in share plans and remuneration generally are not easily codified.
While there has been no rewrite, the Guidelines not surprisingly build on the Working Group’s final report and adopt almost all of the proposals.
Points of detail are:
• There is a new emphasis on reporting pay disparity within the group. Median employee pay versus that of the CEO should be disclosed but is alone seen as too simplistic and so disclosure of the ratio between the CEO and the (undefined) executive team is recommended. Given gender pay reporting developments, pay disclosure is something companies are getting to grips with anyway and given the Government’s recent announcements it may suit companies collectively to develop a common reporting system in any event to prevent less flexible legislation being imposed. Companies will be mindful of the cost implications here though.
• There is a completely new section on shareholder consultation (section 11). The Working Group concluded that despite the volume of shareholder consultation on remuneration proposals and changes to policy over the last few years, its quality and impact was mixed. The Guidelines recommend companies focus on key issues, blending strategic investment and governance concerns and that companies should also listen to feedback.
• On bonus disclosure, there is now a clear statement that investors normally expect bonus targets to be disclosed in the subsequent year and certainly two years after payment. Partial deferral into shares is also now “expected”. Where companies take advantage of the greater flexibility (subject to justification) to reward through higher annual bonuses rather than long-term incentivisation, there should be a discount to reflect the greater likelihood of meeting targets. Also, any adjustments made to metrics need to be reported with their impact explained, as should the impact of share buybacks and other capital management decisions.
• The Working Group advocated companies moving away from standard LTIP arrangements and the covering letter sent to RemCom chairmen at the same time as the revised Guidelines were issued makes clear that no single remuneration structure is favoured. Indeed, the Guidelines no longer contain a recommendation for one annual bonus and one long-term incentive scheme, though there is still the overriding call for simplicity.
However, on particular types of award, the new Guidelines have the following comments:
• Matching schemes in addition to other long-term incentives may add unnecessary complexity.
• Despite the Working Group concluding in its final report that performance on grant schemes were not recommended (where performance is measured prior to award and is reflected in the size of the award), there has been no change to the limited cases in the Guidelines where they may be appropriate.
• There is a new paragraph on restricted share awards, saying not all shareholders are in favour, but companies which have earned the trust of their investors may be able to operate them, with quantum at a 50% discount compared with the size of typical LTIP awards.
• Other points are that:
• Shareholding requirements do not just apply to executives while in employment (where for the first time, acquiring shares from “own resources” is recommended). They also apply for “a period after they have left employment”.
• Where there is any disparity between pension contribution rates for executives and the general workforce, companies are expected to show how they will reduce the disparity.
• Finally, share incentive awards should still normally be made in the 42 days following results, but this has been dovetailed with the MAR requirements so that the 42 day period only begins when MAR permits (an interim change on this was made in July 2016).
It is important to remember, however, that the Guidelines are simply guidelines and many companies do not and do not need to comply with them in full. A case by case approach is warranted
This article first appeared in Law-Now, CMS Cameron McKenna's free online information service, and has been reproduced with their permission. For more information about Law-Now