In December 2009, the Association of British Insurers (ABI) published the annual update of its guidelines on executive remuneration policies and practices and a position paper on executive remuneration.
The guidelines are aimed particularly at listed companies. The latest changes are minimal. As expected, they place a greater emphasis on taking into account risk management in considering executive remuneration. In addition, incentive targets should now be "appropriately" stretching rather than simply stretching.
Position paper on executive remuneration
The position paper is intended to provide guidance on how shareholders expect the ABI's guidelines to be implemented in the current market conditions and stress the following key themes:
- Companies should keep their shareholders involved in the remuneration process through prior consultation particularly when their remuneration committees are considering the exercise of discretions.
- Where remuneration committees are considering introducing or changing remuneration arrangements for tax efficiency reasons, these should not increase the company's own tax liability or incur any greater costs.
- Where a company's share price has fallen, a corresponding reduction in share based remuneration levels (as a percentage of salary) should be introduced to avoid participants receiving windfall benefits.
- The payment of bonuses to directors where the company has suffered exceptional detriment can be seen as rewarding failure and should be avoided – remuneration should be justified by performance.
- Where performance targets are being considered these should include an underpinning condition that takes into account the financial performance of the company and which should be considered in addition to performance measures comparative with competitor companies.
- Retention awards to company directors are ineffective and therefore retention reasons alone should not be used to rationalise remuneration uplifts.
- Remuneration committees should not allow an "upward ratchet" of remuneration levels aimed at matching median pay.
- Performance related bonuses should focus on longer-term shareholder value creation and use longer performance periods. Bonus deferrals and the potential "claw-back" of incentive awards are encouraged.
Remuneration committees should carefully consider shareholders' reaction to remuneration policies given the likely increased scrutiny of executive pay over the coming year.
View the ABI guidelines on Executive Remuneration Policies and Practices (20 page pdf).
View the ABI position paper on executive remuneration (8 page pdf).