The Association of British Insurers is one of the most influential institutional investor groups in the UK. It was one of the first organisations to publish executive pay guidance, and to assess companies against those guidelines. The ABI guidelines have informed similar guidelines developed by Australian investor groups. The latest revised ABI Principles of Remuneration, issued in November, highlight issues on which Australian market investors have focussed this proxy season.

These include three of the ABI’s principles on remuneration policy, with Guerdon Associates comments in italics:

1. Remuneration policies should support performance, encourage the underlying sustainable financial health of the business and promote sound risk management for the benefit of all investors, including shareholders and creditors. We note that companies that emphasise the role of remuneration in company risk management tend to receive a greater level of institutional shareholder and proxy firm support this season.
2. Undeserved remuneration undermines the efficient operation of the company. Excessive remuneration adversely affects the company’s reputation and is not aligned with shareholder interests. This has been particularly evident in the proxy firms’ focus on STI payments, and the extent to which they can be justified. Many of the “no” votes this season stem from this issue.
3. The board as a whole must consider the aggregate impact of employee remuneration on the finances of the company, its investment and capital needs, and dividends to shareholders. “Materiality tests” are now commonly undertaken by proxy advisers and institutional investors. Mid and small cap ASX listed companies are particularly prone to problems in these areas when financial results are poor.

The ABI, like other UK stakeholder groups, now emphasises longer-term performance. This ignores the fact that a significant proportion of investors are active hedge fund managers seeking short-term gains. Nevertheless, there are signs that the UK emphasis is gaining ground in Australia.

Key points from the ABI’s principles include (with our underlining added for emphasis):

• The Remuneration Committee should select a remuneration structure that is appropriate for the specific business, and efficient and cost-effective in delivering its longer-term strategy.
• Executives and shareholders can have divergent interests, particularly in relation to time horizons and the consequences of failure or corporate underperformance. Incentive structures should have a long-term focus.
• To avoid payment for failure and promote a long-term focus, remuneration structures should contain a careful balance of fixed and variable pay. They should include a high degree of deferral and measurement of performance over the long-term. Structures should also include provisions that allow the company to implement malus or claw-back arrangements.

The payment of STI bonuses despite the fact things have gone pear-shaped has been queried at several Australian companies this proxy season. The ABI has captured this in the following principle:

• Shareholders discourage the payment of annual bonuses to executive directors if the business has suffered an exceptional negative event, even if some specific targets have been met. In such circumstances, shareholders should be consulted on bonus policy and any proposed payments should be carefully explained.

The ABI also emphasizes the need for board discretion. This has been an element also welcomed by Australian investors, indicating trust in the board to do the right thing:

• Remuneration Committees should retain the discretion to ensure that the outcomes of executive pay schemes properly reflect overall corporate performance and the experience of the shareholders in terms of value creation. Discretion should be exercised diligently and in a manner that is aligned with shareholders interests, and within previously agreed boundaries and maxima. Which means downward discretion, rather than upward discretion when performance hurdles are not met!

The ABI principles are an interesting guide, in that they cover a full range of issues that directors will need to consider at one time or another. While their actual guidance may not always be applicable, their prescriptions indicate the way many institutional investors are thinking. The revised principles can be found HERE

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