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It’s the time of year…

that you need to consider the latest guidance on executive remuneration published by the Investment Association, Institutional Shareholder Services and Glass Lewis.

Investment Association Principles of Remuneration

The IA published on 22 November 2018 its annual letter to Remuneration Committee Chairs as well as its updated Principles of Remuneration.

At a time of corporate governance change and continuing shareholder, media and public disquiet over executive pay, IA members are apparently concerned that some companies pay only lip service to shareholder views on remuneration.

The Principles have been updated to be clearer and sharper, including taking account of the new UK Corporate Governance Code and developing best practice. Areas to highlight include:

  • malus and clawback: Remuneration Committees should consider the most appropriate trigger events for a company, extending beyond the current market standard triggers of gross misconduct or misstatement of results;

  • shareholding requirements and post-employment holding periods: the Principles outline which shares can count towards the shareholding guidelines and the expectation of investors on post-employment holding periods (including the level of holding expected, and the mechanisms used to enforce those holdings);

  • pensions: pension contribution rates should be aligned with the contribution rate given to the majority of the company’s workforce (with pension contributions for current executive directors to be reduced over time without any compensation);

  • restricted shares: a majority of IA members are willing to consider the introduction of restricted shares provided that the rationale is adequately explained;

  • leaver provisions: the Principles have been updated to reflect member expectations and current best practice, in particular requiring some reclaim where a ‘retiring’ executive goes on to take up a new position; and

  • dividend equivalents: investors expect any dividends accruing on deferred bonuses or vested shares to be paid in shares.

For 2019, key issues highlighted by the IA in their letter to Remuneration Committee Chairs include:

  • Remuneration Committees need to be more responsive to investor concerns and not simply argue that they are operating in exceptional circumstances;

  • IA members will be voting against Remuneration Committee Chairs and individual members where they feel that the committee’s decisions have failed to meet investor expectations;

  • executive remuneration is a growing reputational issue and directors can no longer rely solely on the contractual nature of a remuneration payment. Investors and wider stakeholders want directors to consider the issue of fairness and the wider employee pay context should be considered when taking executive remuneration decisions;

  • shareholder consultations should focus on major strategic remuneration issues rather than the minor details of pay;

  • companies should report their pay ratios in 2019 (using Option A in the regulations) even though only legally required to report against them in the 2020 Annual Report;

  • companies should follow the updated GC100 and Investor Group Remuneration Reporting Guidance being published shortly; and

  • companies must adequately justify the level of remuneration paid to executives, (including any increases), and Remuneration Committees should show restraint in relation to overall quantum.

Institutional Shareholder Services

ISS published updates to its UK proxy voting guidelines for 2019 on 19 November 2018.

Amendments include changes to the following policies:

  • target bonuses should typically be no more than 50% of the maximum bonus potential;

  • share awards should be subject to a total vesting and holding period of five years or more;

  • when there has been a material decline in a company's share price, Remuneration Committees should consider reducing the size of LTIP awards at the time of grant;

  • fees payable to NEDs should not be excessive relative to similarly-sized companies in the same sector; and

  • dilution limits for new or amended LTIPs should be set in line with IA guidelines.

ISS proposes to publish the amended policies on 7 December, and to apply them to shareholder meetings taking place on or after 1 February 2019.

Glass Lewis

Glass Lewis has published its 2019 proxy paper guidelines for the UK.

Changes from the 2018 version include:

  • where appropriate, it may recommend voting against re-election of chairs and members of the committees where the response to shareholder concerns has fallen below a qualitative threshold; and

  • clarification that while the pay ratio has the potential to provide additional insight when assessing a company’s pay practices, it will not base voting recommendations solely on such ratios.

HSF comment:

Latest thinking on remuneration is very much an evolution, not a revolution, and builds on what’s already been going on in the market in the last couple of years.

The issue of fairness, both as a political and a moral matter, is gaining much more traction, especially with Gender Pay Gap and CEO Pay Ratio reporting requirements, as well as the new Corporate Governance Code requiring that Remuneration Committees must take wider workforce pay into account when deciding director and senior executive pay, and must explain to the workforce how senior management pay decisions reflect wider company pay policy.

Alignment of executives with shareholders through long-term share holdings, including following cessation of employment, is a key issue and investors are looking to companies to move from shareholding ‘guidelines’ to contractual arrangements under which the disposal of shares by executives is not only restricted but can also be enforced.

Key contacts

Paul Ellerman photo

Paul Ellerman

Partner, London

Paul Ellerman
Mark Ife photo

Mark Ife

Partner, London

Mark Ife
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Niall Crean

Senior Associate, London

Niall Crean