Welcome to our Employee Incentives Update, we hope you find it useful. This Update contains a round-up of key developments in remuneration during June 2017.

In summary:

HMRC

  • Following technical issues with its online filing system, HMRC extends the deadline for the 2016/17 employment related securities tax returns from 7 July to 24 August

Case Law

  • The High Court confirms that a board of directors has a duty to exercise its discretion in a share option agreement reasonably, following due process and considering all the material points

Financial Services

  • PRA updates remuneration policy template and tables
  • FSB consults on draft Supplementary Guidance to the FSB Principles and Standards on Sound Compensation Practices

In full:

HMRC

Deadline for 2016/17 employment related securities annual tax returns extended

Following technical issues with its online filing system, HMRC has extended the deadline for the 2016/17 annual employment related securities (share schemes) tax returns from 6 July to 24 August 2017.There had been issues with the online system which meant that some returns could not be submitted. HMRC is now confident that these issues have been resolved.

Penalties will now be charged if the return isn’t filed by the extended deadline of 24 August 2017, with the first late filing penalty of £100 being issued on 25 August 2017. Additional automatic penalties of £300 will be charged if the return is still outstanding 3 months after the original deadline of 6 July, and a further £300 if it’s still outstanding 6 months after that date. If a return is still outstanding 9 months after the 6 July, daily penalties of £10 a day may be charged.

Case Law

Exercise of discretion in option agreement

The High Court has determined that where a share option agreement stated that it could only be exercised with the consent of a majority of the board of directors, this did not give the directors an unconditional right to veto the exercise of the options. Instead, in determining whether such consent should (or should not) be given, the board: (i) is bound to adhere to a proper process for the decision in question including taking into account the material points and not taking into account irrelevant considerations; and (ii) is bound not to reach an outcome which was outside that which any reasonable decision-maker could come to, regardless of the process adopted.

In this case, as the directors could not show that any real process had been adhered to, the High Court granted specific performance of the option agreement, allowing the option holders to obtain the shares at the option price in the agreement.

This case illustrates the importance of documenting why discretion has been included in an option agreement (or option plan rules), the circumstances in which such discretion is likely to be used and, when discretion is being exercised, ensuring that a proper process is put in place with a robust paper trail to document such process.

Watson and others v Watchfinder.co.uk Limited [2017] EWHC 1275

Financial Services

PRA updates remuneration policy template and tables

On 6 June 2017, the PRA updated the Remuneration Policy Statement (RPS) questionnaires and tables (with the exception of RPS Annex 1 – Malus, and RPS Tables 7 and 8) to reflect submission deadlines and document references. Other changes are:

  • an amendment to question (D.i) within the RPS Level 1 questionnaire relating to the identification of Material Business Units (MBUs); and
  • additional notes on buy-outs within the notes section of the RPS tables.

On 19 June 2017, the PRA updated the notes section of the Remuneration Policy Statement (RPS) Table 7 to notify firms that they may include information in relation to the malus applied to buy-out awards within Part C of the table 7, where appropriate.

The changes can be found via the PRA website.

FSB consults on draft Supplementary Guidance to the FSB Principles and Standards on Sound Compensation Practices

The FSB Principles and Standards (P&S), which apply to significant financial institutions, were published in 2009, in the aftermath of the global financial crisis and at a time when there was more limited regulation of compensation. Since the issuance of the P&S, many supervisors and firms have directed considerable attention to improving compensation and related risk adjustment practices.

In 2016, the FSB agreed to develop guidance on better practice regarding the application of the P&S to misconduct risk and, on 20 June 2017, the FSB published Supplementary Guidance for consultation.

The Supplementary Guidance, which is designed to apply to significant financial institutions, states that "The pillar of the proposed guidance is the effective use of compensation tools based on strong governance and management of misconduct risk through compensation practices, including robust performance management practices". Once finalised, the Supplementary Guidance will "provide firms and supervisors with a framework to consider how compensation practices and tools, such as in-year bonus adjustments, malus and clawback, can be used to reduce misconduct risk and address misconduct incidents". The Supplementary Guidance is not designed to set new principles or standards but is instead designed to provide additional guidance in respect of the application of the existing principles and standards.

The recommendations address:

  • the full range of responsibility, from senior management to the front line, for conduct issues arising from firm culture and commitment to ethical conduct;
  • the integration of non-financial considerations relating to conduct in a balanced approach to performance assessment and compensation;
  • the alignment of compensation incentives to the longer time-frame misconduct risk may take to materialise;
  • the use of transparent, consistent and fair compensation policies and procedures that establish clear expectations and accountability for conduct.

The recommendations also set out an expectation that supervisors should, within the scope of their authority, monitor and assess the effectiveness of firms’ compensation policies and procedures in managing misconduct risk.

Although an additional guidance is always helpful, many of these issues have already been addressed by the PRA in its Supervisory Statement 2/17on remuneration published in April 2017.

The deadline for responses to the consultation is 30 August 2017. A copy of the consultation can be found here.