June 16, 2021

Volume XI, Number 167

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Are we getting better at drafting effective regulations?

With over a third of the UK FTSE100 having published their DRRs, it looks like the trends identified in our post on 22 March are continuing. A really interesting question to look at, now that nearly half of the FTSE100 companies have published their reports, is whether all the new regulations and guidelines are changing behaviour – and in the manner they were designed to.

With few companies putting their whole policy up for re-approval, it is little surprise that a hot topic is disclosures of bonus targets.   We expect the Investment Association to continue to be disappointed.  Prospective disclosure would appear to be dead in the water, with little elaboration on why the targets are deemed to be commercially sensitive.  The emerging pattern seems to be that companies giving the best disclosure set out the performance metrics and weightings for the current year bonus and full details of the prior year targets and performance.  However, there is still a great deal of variability, with companies finding that personal/non-financial targets are presenting particular problems.

The other trends from the DRRs published to date are the small increments by which executive base salaries are moving and the ever-increasing periods before executives have the freedom to realise the value associated with share-based payments.

Requiring listed companies to disclose executive pay in 2002 had the unintended consequence of accelerating executive salaries (presumably because few companies would recruit or retain any executive director who didn’t deserve to be paid in the upper quartile).  In contrast, the requirement to put salary increases into an approved policy and compare percentage change in salary for the CEO to that of the broader workforce seems to have delivered the intended consequence.  Salary increases for the C Suite are much more muted and broadly mirror the pay-rise percentages applicable to the rest of the UK-based workforce.

There is little movement on performance periods, with three years still being the norm, but the number of companies imposing further retention periods is edging up, with an additional 2-year holding period being most favoured. These retention periods are designed to encourage executives to make decisions that will deliver sustainable growth as well as having a longer period during which to enforce malus provisions.  As these adjustments in the market feed in to policy discussions later in the year (at least for most companies) we’d expect to see some clear trends this time next year for extended timelines from grant to complete release from any obligations.  We think that a total wait of 5 years will be the most common approach, with longer periods used in the finance sector due to regulatory compliance requirements.  Whether the length of the performance periods themselves will start to move upwards next year remains to be seen.  Again, it looks like the new regulations could deliver on at least some of the intended consequences they set out to achieve.

© Copyright 2021 Squire Patton Boggs (US) LLPNational Law Review, Volume VI, Number 92
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