Well, not quite. Following the merger of the investment affairs division of the ABI and the Investment Management Association in June this year we now have the IMA Principles of Remuneration. So has the new name brought with it significant changes to the expectations of shareholders represented by the newly merged advisory bodies? Thankfully, the answer is no. With only one change of substance and a clarification in response to a number of the early remuneration policies that were put to shareholders at the end of 2013, the IMA Principles of Remuneration makes familiar reading for listed companies and their advisers.
One change of substance
The one change of substance is in respect of allowances. Financial institutions have sought to manage the impact of the EU’s new bonus cap rules through the use of allowances. In response, the IMA has included in the guidelines a note that using “allowances as part of fixed pay goes against the spirit of simplicity, clarity and pay for performance”. If a remuneration committee considers that an allowance is necessary the payment should be clearly justified and explained. There’s no pulling the wool over the IMA’s eyes!
As we noted in our post on February 9 earlier this year, the first four companies to publish their remuneration reports under the new regulations all published clarifying addendums relating to their recruitment policies. The IMA’s clarification confirms that shareholders will not only object to excessive limits in a company’s recruitment policy, they will also object if there are “no” limits in the policy!
What is more interesting is the introductory letter that was issued to remuneration committee Chairmen, detailing the IMA’s members’ thoughts on the AGM season. It appears that the IMA felt the need to focus remuneration committee chairmen on four key issues in the Principles of Remuneration. The letter states that members are “generally positive” and it welcomes the public assurances that some companies issued following investor concern over their remuneration policies. However, there are still some areas where members are concerned and the letter seeks to turn remuneration committees’ attention to these areas. The areas of concern are as follows:
- Amounts and gearing of variable pay – basic salary should not exceed inflation or the increase for the general workforce and any increase to maximum variable pay should be clearly explained.
- Threshold performance – there are concerns over the absolute amounts paid when awards vest. Sometimes, despite the proportions of awards that vest being low, the absolute amount can still be substantial.
- Length of performance/holding period – performance period for long term incentives should be no less than three years and preferably longer.
- Retrospective changes to performance conditions – this element is much more focused on one particular issue than the title suggests. The IMA is putting down a very clear marker that its members will have no sympathy if performance conditions are overridden by adjustments to take account of adverse exchange rate movements. After all, in the IMA’s view, managing exchange rate movements is part of management’s job.
The AGM season
The letter also comments on members’ experiences from the last AGM season and notes that the engagement process could be improved. The letter suggests that sometimes proposals are put to shareholders too late. Indeed, the point is made that some companies have purported to consult on issues but, in reality, the decisions have already been made. Another common problem appears to be that full information is not always provided. Companies that don’t trip over these points are bound to have a more harmonious relationship with their shareholders and the NAPF (see our previous blog post) also called for improved engagement. There appears to be a theme emerging, although the new regulations have increased dialogue between shareholders and companies there is still some way to go.
The letter also picks up on the “commercially sensitive” opt-out used by some companies to avoid disclosure of retrospective bonus targets. Shareholders feel that this is an area where disclosure has deteriorated rather than improved (definitely not an aim of the regulations). In our view, this aspect of disclosure does seem to be the one that many companies are most uncomfortable about and it isn’t clear to us how the gap between shareholders’ expectations and companies’ needs for confidentiality can be easily bridged.
And finally, an interesting interpretation of the new regulations. The IMA points out that a number of companies provided public assurances on the operation of their remuneration policies ahead of their AGMs. IMA members do not expect companies to seek re-approval for the policies with these assurances incorporated but do expect details of the assurances to be included in the Remuneration Report. This pragmatism is to be applauded and is consistent with what some see as looking likely to be accepted emerging practice – companies may look to include more stringent provisions in their remuneration practices without seeking formal shareholder approval for a new remuneration policy. There is no carve out in the regulations for this kind of change to the remuneration policy and following the GC100 guidance (which states that revisions must be approved by shareholders) this is not necessarily in strict accordance with the new regulations, but it certainly does reflect a sensible approach, particularly as companies adapt to the new regime.
In summary, although the Principles of Remuneration only contain one material change, the introductory letter offers further insight into how shareholders feel companies are doing at complying with the new regulations. It reinforces the NAPF’s view that although, on the whole, there is a lot to be positive about, companies are not quite there yet.