In February 2010, RiskMetrics Group (RMG) published their 2010 UK Remuneration Guidance.
RMG was created in 1994 as an internal function within JP Morgan producing measurements of market risk in portfolios. Two years later, RMG was spun out of JP Morgan into a separate company. Its role is to set standards in financial risk management. As part of this role, its analysts examine corporate governance, compliance, accounting, legal, transactional and sustainability risks and produce research reports and voting recommendations.
This guidance has been published in order to provide Remuneration Committees, who are currently having to reach decisions on executive remuneration in uncertain economic circumstances, with a full appreciation of the concerns and expectations of investors. The guidance outlines the most common considerations which RMG will take into account when their analysts issue voting recommendations for remuneration-related proposals by UK public companies in 2010. The guidance is consistent with the policy of the National Association of Pension Funds. RMG has also consulted its clients to ensure it is line with prevailing investor sentiment.
The guidance sets out statements of principle on general policy and practice which RMG proposes will ensure a robust approach to executive remuneration. RMG also provides guidance on various components of the remuneration package including:
- Basic salaries - RMG states that although the economic climate is improving, post-freeze or ‘catch-up’ salary increases will not be justified and any increases should only reflect the factors set out in their guidance.
- Bonuses - Policy Statement 09/15: Reforming remuneration practices in financial services - Feedback on CP 09/10 and final rules issued by the Financial Services Authority (FSA) on 12 August 2009 suggests that bonuses and other remuneration arrangements, particularly in banks, have contributed to economic instability. Whilst the FSA Policy Statement was primarily aimed at banks, RMG considers various principles contained in the FSA guidelines could potentially apply to all industry sectors and these have therefore been included in the RMG guidance.
- Long term incentive plans - The guidance provides suggestions about the remuneration options available both for “existing awards” and “awards granted in 2010”.
- Service contracts - RMG provides guidance in relation to termination provisions including termination payments.