New UK investor remuneration guidelines
30/11/2015
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Regular readers may recall that the UK Investment Association were to review the structures and frameworks for incentive remuneration in listed companies subject to their guidelines, with a view to simplification (see HERE). To an extent, hopes for the review were diminished with the resignation of the IA’s CEO two weeks afterwards. This was not for his initiative to try to simplify executive incentive pay, but probably for pointing out the obvious that, what was good for the goose was also ok for the gander.

The ousted IA chief executive Daniel Godfrey had called for reform of investment manager pay and more clarity on fund fees. This no doubt upset certain members of the Association, and was probably a major contributor to his departure. But Godfrey was probably advocating change in the likelihood of EU regulatory change requiring greater disclosure of fund management remuneration and fees. Guerdon Associates will monitor this, given that there have been similar murmurings for fund manager remuneration disclosure in Australia too.

However, despite the departure of their CEO, in meetings last month attended by Guerdon Associates’ UK partner firm (MM&K – see HERE), the IA indicated it was pressing ahead with the review of incentive plans and investor requirements, with a report to be released in the northern Spring.

Meanwhile, the IA released an update of the current remuneration guidelines, which have a significant influence across the investor community both in the UK and in Australia.

The guidelines on executive remuneration (formerly known as the ABI guidelines) have only one substantive change. That is, long-term incentives should not pay out until at least five years after the date of award.  This would still allow for the usual 3-year performance period, but a further holding period of two years would have to be imposed.

This is a trend we are seeing in Australia, although the take up rate has been limited to ASX100. Interestingly, within the ASX50, most companies now have 4 year performance periods, and only a very few in this group have a holding period beyond the performance period.

In effect, the IA has followed Fidelity, which advocated a global policy for minimum 5-year LTI terms early last year.

While many would regard the new guideline as a positive development, the take-up rate in the UK may be hampered by one of the several unintended consequences of last year’s changes to UK legislation. About 40% of large UK companies will need to amend their polices to comply with the guideline or receive a “red top” classification for poor governance. But if a company adopts the approach of introducing a holding period after vesting in order to make up the 5-year term, it will need to decide whether or not to seek shareholder approval to amend its remuneration policy as required under UK law on the basis that this will bring it into line with investor guidelines and the change is not to the benefit of directors. This has happened with clawback policies required in banks.

The IA has sent a letter to the chairmen of remuneration committees of quoted companies to highlight this change, but also to re-emphasise certain principles about which investors have concerns:

  • Salary increases: there is continuing concern about the level and frequency of increases in executive directors’ salaries. Investors have an expectation that increases in basic salary should be limited either to inflation or to the percentage increase given to the company’s staff as a whole, and if not, clear and explicit justification should be given;
  • STI disclosure: investors note that a number of companies fail to comply with the requirement to specify the measures and targets by reference to which incentives are paid. Unlike Australia, where there is also required, the UK regulations permit non-disclosure when the targets are considered by the company to be “commercially-sensitive”. However, the IA wants use of this to be more fully justified. The letter from the IA makes it clear that investors expect targets to be disclosed retrospectively at the end of the year or at a specified time in the future. The IA warns that it will give companies with a year-end of 1 December 2015 or later who do not disclose targets or do not commit to full disclosure a “red top” and an “amber top” to those that disclose relative achievement with no commitment to disclose the actual targets;
  • Service contracts: notice periods of up to 12 months are still acceptable. However, investors now require new contracts to provide for equal notice from the executive and the employer. Australian boards trying to lure UK executives may groan at the prospect of having to wait 12 months for their preferred UK appointment to get his/her garden in order. This is probably one guideline that would work against shareholders’ interests if implemented in Australia;
  • Recruitment: “golden hello” awards should not be re-issued if there is a fall in the company’s value – investors consider that the executive and the company should bear the risk and that shielding the executive is inappropriate; and
  • Leaving arrangements: as previously stated, remuneration committees should take a firm line when dealing with executives who leave and full justification should be given of decisions to consider them “good leavers”.

See the IA’s new guidelines HERE.

© Guerdon Associates 2021
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