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Investment Association sets bar for 2018 AGM season

The Investment Association (IA) has published its annual letter to Remuneration Committee chairs and updated its Principles of Remuneration (the “Principles”), and many companies will need to take action before their 2018 AGM. The IA is encouraging voluntary disclosure of CEO pay ratios in 2018 Directors’ Remuneration Reports, has introduced a new requirement to defer bonuses in excess of 100% of salary and is keeping up the pressure on overall levels of pay.

The remaining changes to the Principles are limited, and for the most part reflect the continued focus on pay restraint and transparency. An interesting addition to the foreword is a specific reference to the Principles being relevant to AIM listed companies – perhaps a shot across the bows for those companies?

CEO pay ratio disclosure

The IA is encouraging companies to voluntarily disclose the ratio of CEO to employee pay in 2018, in advance of this being required by law. The government has previously indicated the draft CEO pay ratio legislation will be published during 2017, so companies should hopefully have that draft available when preparing this disclosure.

The Principles provide that the Remuneration Committee must explain why this figure, and any similar information (e.g. as part of Gender Pay Gap Reporting), is appropriate and must explain those figures in the context of the company’s business.

Bonus deferral

A new requirement to defer any bonus opportunity in excess of 100% has been included. This is likely to have a broad impact as most companies outside the banking sector allow bonuses in excess of 100%.

Companies will want to consider how to comply with this requirement in practice. It may be possible to grant deferred awards under existing incentive plans, or companies may decide to put in place a specific bonus deferral plan given that these awards are unlikely to be subject to further performance targets.

Introducing bonus deferral may be a change to a company’s Remuneration Policy. In our view this change should not benefit executive directors and is being made to reflect shareholder guidelines. Following the approach taken by many companies when introducing clawback, companies may decide they can implement this change without further shareholder approval.

The full impact of this change will not be visible until 2019 at the earliest, as annual reports published in 2018 will cover bonuses already paid during the 2017 financial year.

Pressure on quantum

Unsurprisingly, levels of remuneration remain a focus. Companies are encouraged to consider whether remuneration potential should be decreased, to consider the impact of “automatic” inflationary salary increases and to take into account the broader social context when setting pay, rather than relying solely on benchmarking.

Pension contributions also continue to be a focus. The IA believes contributions for executive directors should be at the same level as those for the general workforce and has updated the Principles accordingly.

Finally, the existing requirement that payments should not be made where there has been an exceptional negative event (even if some targets have been met) has been extended. Previously this applied to annual bonuses only but it now applies to variable remuneration generally.

What else is on the radar for the 2018 AGM season?

Disclosure of performance targets

The IA reports concern that some companies are setting performance targets for executive pay that are different to headline key performance indicators (KPIs) or figures reported elsewhere. If performance targets differ from, or are adjusted from, company KPIs or reported numbers the IA requires that the Remuneration Report explain why this is appropriate and how the target has been adjusted.

Where payments are made for achieving personal or strategic performance targets the rationale for this must be explained, rather than the target simply being described. The IA warns that its members will carefully scrutinise the rationale for such payments to ensure they are warranted and companies which fail to provide sufficient information will receive an Amber Top from IVIS.

Bonus targets which are not disclosed due to commercial sensitivity must be disclosed within 12 months of the bonus payment. This reflects a further tightening on annual bonus disclosure; the previous version of the Principles recommended disclosure within 12 months but would allow a delay of up to 2 years.

Relocation benefits

A new requirement to disclose these at the time of appointment has been included. The Principles provide that such benefits should be in place for a limited time and each element of the benefit, including its duration, must be disclosed to shareholders.

Annual reports published in 2018 should include details of relocation benefits provided to new directors during 2017. More generally, this may be a prompt to re-examine existing relocation benefit policies to ensure these will be acceptable to shareholders in future. Features such as ongoing (rather than one-off) relocation assistance are likely to be challenged by shareholders.

Remuneration structures

The past two years have seen a number of proposals on changing remuneration structures, with the most radical being a suggestion to move away completely from using long term incentive plans (LTIPs). The IA has amended the Principles to make clear it does not promote any single remuneration structure but rather encourages companies to choose the remuneration structure which is most appropriate for their business strategy and their company.

Restricted share plans have recently grown in popularity, even though very few companies have actually adopted them. The IA has made clear that, in the right circumstances, its members will support restricted share plans but are concerned that in some cases these structures have been proposed because existing remuneration structures have failed to pay out.

Shareholder consultation

When consulting with investors companies will in future be asked to provide details of their whole remuneration structure and not just proposed changes. This makes sense, as otherwise investors would be asked to make a decision in isolation. The Principles also require the Remuneration Committee to undertake a final review of any proposed changes to consider whether they are still appropriate in light of any events that take place after consultation ends but before implementation.

Following a number of companies withdrawing remuneration resolutions prior to an AGM (presumably because the company did not believe they would be approved) the letter makes clear that, in these cases, companies should consider all shareholder feedback and consult further before resubmitting the Remuneration Policy to shareholder vote.

Re-election of Remuneration Committee chair

The letter sets out some of the circumstances in which investors will vote against the re-election of a Remuneration Committee chair. These are where an investor has voted against the remuneration resolution in two successive years, or at the next AGM following a company failing to get majority support for a remuneration resolution. Although companies will welcome clarity on this issue, it is likely to remain an area of concern for the chairs of Remuneration Committees.

Although the 2018 AGM season is expected to be fairly quiet, as fewer companies put their Remuneration Policy to shareholders for approval, there are a number of significant changes on the horizon (as discussed in our August blog post.) The IA’s focus for the 2018 AGM season reflects this: few changes have been made to the Principles and those which have are in line with the prevailing approach to executive remuneration and the changes to come. No wonder it feels a little like the calm before the storm…

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About this Author

Liz Pierson, attorney, Squire Patton Boggs
attorney

Liz Pierson is a partner in the Tax, Strategy & Benefits Practice. She advises on executive remuneration and incentives issues for both public and private companies. Liz has experience in advising on corporate governance issues relating to remuneration and incentives, remuneration for financial institutions and on the impact of corporate transactions on share plans (e.g. IPOs, takeovers, rights issues). She also has significant experience in advising on incentives for private equity portfolio companies, including acquisitions and disposals, incentives for management...

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