The GC100 and Investor Group have recently published updated directors’ remuneration reporting guidance to reflect the changes in practice since their original guidance in 2013 and the voting patterns of the 2016 AGM season. The large majority of the FTSE100 will be putting new remuneration policies to a shareholder vote next year on the expiry of the 3-year policies they put in place in 2014. The amended guidance should (hopefully!) help companies avoid the negative shareholder votes that were so in evidence this AGM season, as we reported in our review of the 2016 directors’ remuneration reports (DRRs) of the FTSE100.
Following on from Team GB’s great success in the Olympics, we thought we would set out what the coaches (the guidance) suggest are the extras that Team GB PLC needs to focus on in order to ensure favourable scoring from the judges (shareholders) next time round.
There is a much stronger steer on the disclosure of performance targets relating to incentives. The bar should be set high – “any decision to rely on the commercial sensitivity carve-out should not be taken lightly”. For short-term incentives (usually annual bonuses), in the 2016 DRRs there was near-universal reliance on commercial sensitivity in order to explain non-disclosure of annual bonus targets. In only a very few cases were there any company-specific circumstances disclosed to explain why the performance measure or target in question was considered commercially sensitive. The coaches remind us that the judges expect retrospective disclosure of these targets, with an indication of when disclosure will be made. Some members of Team GB PLC indicated that it may never be appropriate to disclose their short-term performance targets. In the 2016 DRRs, targets for performance conditions for long-term incentives were almost universally disclosed prospectively.
The coaches emphasise that the policy table should include an indication of the weightings of each performance measure or groups of measures which may be expressed as a range, for both short-term and long-term incentives. In the 2016 DRRs, Team GB PLC was pretty good at this discipline.
Virtually all of Team GB PLC put in place their first remuneration policies in 2014. A significant number (13) of FTSE100 companies put forward a new policy early, in the 2016 AGM season. The coaches stress that putting in place a new policy mid-cycle requires a coherent rationale to be put to the judges as to the reasons for doing so. This seemed to be a big ask in some cases in 2016; two companies didn’t even get the simple majority vote in favour required.
The judges, as always, will be concentrating on long-term performance and Team GB PLC must demonstrate the link between the overall remuneration packages of the directors and the company’s strategy. The remuneration committee chairman’s statement should set out clearly the linkage between the company’s remuneration policy and its annual strategic report. A notable feature of Team GB PLC’s DRRs this year was the general beefing up of the remuneration committee chairman’s letter.
An easy win, this. The coaches recommend that even if a company made no payments for the loss of a director’s office or payments to ex-directors, a simple negative statement to that effect should be made.
The coaches caution against remuneration committees applying their discretion in an upwards-only direction. It may be true that on a mathematical or qualitative basis, performance criteria have been satisfied. However, a member of Team GB PLC will be in danger of receiving votes against where payments are based simply on the tariff without any subjective analysis of the overall performance of the company, if that has been lacklustre. The key is to make sure that the “outcome balances management performance and the shareholder experience”.
The coaches clarify the fact that not only must the future policy table specify the maximum that may be paid in respect of all aspects of remuneration (on which, judging from the 2016 DRRs, Team GB PLC have a way to go yet), but the maxima must be stated for each individual director, expressed as either monetary values or percentage of salary.
The judges will mark Team GB PLC down for choosing too narrow a comparator group (for example, just senior executives) for the disclosures relating to the percentage change across the year in salary, benefits and bonus paid to the CEO as compared to the average of these percentages for other employees. From our review of 2016 DRRs, the choice of the employees used for the comparator group is something that shows a wide degree of variation across the Team and it will be interesting to see how it responds.
Where a member of Team GB PLC has received a significant percentage vote against a remuneration resolution, it must disclose the reasons for this (if known) in the DRR and say what it has done to appease the judges. If the reasons are not known, the company must say what it has done to try to find out the reasons. In the 2016 season, there was a mixed response to votes against. Of the nine companies that had a significant vote against, only a few took the trouble to speak to investors early enough (before the AGM) to be able to put the reasons at the bottom of the announcement of the votes; the others didn’t comment on the vote against.
If companies manage to incorporate these changes to the guidance, with a bit of luck, next AGM season will see more medals and fewer thumbs down for DRRs.