For many years the Investment Association (IA) has published guidelines setting out the issues that will influence their members in deciding whether or not to support the remuneration policy of a company or approve the adoption or amendment of a particular share plan or incentive structure.
This year’s guidance highlights the following topics as key areas of focus for 2020:
Remuneration structures: Remuneration Committees should select a remuneration structure which is appropriate for their specific business, efficient and cost-effective in delivering its longer-term strategy. It should be simple and understandable. It is the view of the IA that long-term investment plans (LTIPs) are not working as effectively as they could. Remuneration Committees are therefore encouraged to review their remuneration structures and shareholders will consider alternative remuneration structures in place of LTIPs if they are aligned to the company strategy.
Levels of remuneration: Remuneration Committees should consider the wider employee pay context and fairness of executive pay when setting pay levels and deciding on remuneration outcomes. In the 2020 AGM season, investors will continue to look closely at how any increases to basic salary or variable pay opportunity are justified and will expect Remuneration Committees to show restraint in relation to overall level of executive pay.
Annual bonuses: Remuneration pay-outs must be justified by robust transparency on financial, strategic and personal targets so that the link between pay and performance can clearly be seen. Strategic and personal targets and outcomes should be disclosed separately.
LTIPs: If a LTIP structure is used, performance conditions should be carefully chosen, so that they are suitable for measurement over a long period of time. The performance period should be clearly linked to the timing of implementation of the business strategy, which should be no less than three years and shareholders would generally prefer longer. The use of additional holding periods is expected by investors, so that in total the performance and holding period should cover a period of at least five years.
Discretion on vesting outcomes: The guidelines have been updated to propose that Remuneration Committees introduce discretion into their incentive schemes which would allow them to limit the vesting outcomes if a specific monetary value is exceeded. The recommendation is to consider including a discretion in plan rules to ensure that vesting outcomes are in line with company performance and are not excessive, although the level at which the discretion should operate is left to individual remuneration committees to determine.
Pensions: From January 2020, where the pension contributions for incumbent directors are above the majority of the workforce rate, Remuneration Committees are expected to set out a credible action plan to reduce the pension contributions of incumbent directors to the majority of the workforce rate by the end of 2022.
Post-employment shareholding requirements: The guidelines propose that post-employment shareholding requirements should be established for all new executive directors and for existing executive directors at the earliest opportunity and at a minimum by the company’s next policy vote.
Good and bad leavers: New guidance has been added regarding payments to departing directors. Payments in lieu of notice should only consist of contractual entitlements (salary, pensions and benefits) and should reflect the notice period. Annual bonuses should only be paid to good leavers and deferred bonuses should be settled in shares in accordance with the normal deferral schedule. Companies should disclose whether a director is treated as a good or bad leaver and the reasons for the decision.
Non-financial performance measures: Guidance on drafting of operational performance targets has been removed. Instead, the IA principles now say that Remuneration Committees should consider including strategic or non-financial performance conditions, such as conditions relating to environmental, social or governance (ESG) objectives. ESG measures should be material to the business and quantifiable and the company should clearly explain the link to the company’s strategy and the measurement method.
The provision regarding the use of alternative remuneration structures has no associated guidance with it, so it will be for companies proposing such structures to demonstrate to their investor shareholders that the proposals are aligned to the company’s strategy. If you would like any help understanding your obligations regarding executive pay please contact any member of the corporate team.