Summary

The Investment Association has issued its annual update on remuneration.  Key points to note are that shares from long-term incentives should not be sold until five years after award and that a major revamp of the guidelines is expected to be announced in the Spring of 2016.

Background

The so-called “ABI guidelines” on executive remuneration have for many years set out limits on the number of shares which listed companies can issue for incentivisation purposes and other employee share plan arrangements. If companies do not comply with the guidelines they face shareholder opposition to their remuneration arrangements and so ignore them at their peril.

The relevant part of the ABI has now moved to the Investment Association, but the Investment Association has continued issuing annual updates for companies and has just released one for 2016 in time to influence remuneration proposals for next year.

Changes

The key change to its guidance this year is that the Investment Association now expects rather than suggests that executive directors should not be able to sell long-term incentive award shares for cash until at least five years after the award date.

In most cases, this will mean an initial three-year performance period when shares are “earned”, followed by a two-year period in which any shares acquired must continue to be held (other than those sold to pay tax). There are other ways of achieving the same five-year objective, though.

Many companies have been moving to these five-year arrangements for some time anyway, under pressure from some key institutional shareholders, notably Fidelity.

For companies that have not already introduced these arrangements, any change is unlikely to need shareholder approval or be a change in the terms of the directors’ remuneration policy that needs shareholder approval. The arrangements are part of a wider trend to require executives to build up a shareholding stake – and for longer vesting periods, too. However, while employees are unlikely to be able to object to these terms for awards going forward, they may value awards less.

The Investment Association customarily also writes to remuneration committee chairmen at this time of year. This year’s letter includes familiar calls for salary restraint and greater disclosure of bonus targets, for notice periods in new executive director contracts to be the same whether notice is given by the company or the director and for the ability to delay termination payments where there is any ongoing investigation affecting the company. There is also an expression of concern that recruitment awards are being guaranteed in the event of a fall in their value after the executive director joins, and that companies are too generous in treating departing executives as good leavers, neither of which are seen as appropriate.

Finally, the Investment Association gives notice that a major revamp of the guidelines is expected to be announced in the spring of 2016.

The revised guidelines and the letter to remuneration committee chairmen can be found here.