The Association of British Insurers (“ABI”) published its revised Guidelines on executive remuneration on 14 December 2006, we summarise the main changes.

The new foreword to the Guidelines from ABI Director General Stephen Haddrill confirms that the Guidelines apply to companies with a main market listing but are “useful” for others. All companies are encouraged to observe the Guidelines in the spirit of best practice. A copy of the Guidelines is available at: http://www.ivis.co.uk/pages/framegu.html.

Overview

The ABI have reformatted their guidance providing over-arching Principles, Main Provisions and more detailed Guidance. The foreword states that there are “no significant changes” and that they are not more prescriptive. However, this is more that just an editing exercise. We have summarised below the major changes from the 2005 Guidelines.

Remuneration Committees

There is a new provision which requests Remuneration Committees to “establish effective procedures for disclosure and communication of strategic objectives, which enable shareholders to take an informed and considered view of remuneration policy and its implementation”.

The emphasis on how policy aligns with strategic objectives is new, but many companies already do this.

Base pay

Salaries paid at median level now need to be justified. Previously, only salaries paid above median required justification. The ABI’s reasoning is that Remuneration Committees need to carefully consider the size of salary, rather than a median salary being an automatic response.

Annual bonuses
The ABI wants to see more stretching performance targets where the size of the annual cash bonus increases. This is in response to increasing levels of bonuses being paid in 2006.

Pensions
The ABI has reminded Remuneration Committees that they need to consider pension costs as an element of fixed remuneration costs, rather than as a separate item. Therefore, pension costs should be factored into consideration of the balance between fixed and variable remuneration available to executives.

In addition, the ABI has expressed a strong preference for pensions paid early on retirement to be subject to abatement. The ABI’s expectation is that this will apply to new executive directors’ service contracts, and where such provisions exist in current contracts, for these to be disclosed in Remuneration Committee reports.

Contracts & severance

The ABI’s view is now included in the Guidelines, rather than as a joint statement between the ABI and the National Association of Pension Funds.

The only change relates to additional protection in the form of compensation for severance as a result of a change of control. The ABI has removed the words "this is acceptable if highly exceptional circumstances exist, i.e. the recruitment of a new CEO of a troubled company"; such that contracts can no longer provide protection, regardless of the circumstances.

Share plans

The ABI guidance remains largely the same. However, the following are of note:

Longer performance periods

Performance periods of longer than three years are encouraged. The ABI’s view is that this is consistent with the new statutory requirement on directors to consider the long term consequences when fulfilling their duty to promote the success of the Company.

Pre-grant performance conditions

Pre-grant performance conditions are generally not suitable. Previously, the ABI considered such conditions possible in certain circumstances. In addition, in relation to setting a premium exercise price, the ABI has removed the words "except in exceptional circumstances". Therefore, a premium exercise price can no longer be a substitute for performance conditions, regardless of the circumstances.

Age discrimination

The guidelines no longer distinguish between the treatment of leavers by reason of retirement and other “good leavers”. This is to address age discrimination concerns. In all good leaver situations, the ABI wants to see pro-rating of awards and for performance conditions to be tested either over the original performance period or over the shortened period to leaving.

Dilution – small companies limit extended

In relation to dilution limits, the flexibility for very small plcs to apply only the 10% limit to all plans has been extended from companies of up to £5m total market capital to companies of up to £10m total market capital.

Subsidiary Company Plans

There is new guidance on requirements that the ABI’s members would expect to see in relation to a share plan established over a subsidiary company’s shares where this can be justified “in terms of contribution to overall value creation”. The requirements are:

  • The plan must be limited to employees of the subsidiary;
  • There must be full disclosure on the accounting treatment used to recognise the cost of options or awards;
  • Grants made must be subject to challenging performance targets;
  • Subsidiary dilution should be disclosed in relation to the parent company’s share plans dilution;
  • There should be disclosure of how the subsidiary’s shares are to be valued and disclosure of how volatility will be measured; and
  • Any entitlement to convert to parent company shares should be disclosed.

Link to 2006 ABI Guidelines: http://www.ivis.co.uk/pages/framegu.html