On 27 November 2012, the Association of British Insurers published an updated version of their Principles of Remuneration, with the National Association of Pension Funds following suit a week later by releasing the updated Corporate Governance Policy and Voting Guidelines. The most striking aspect of the updated ABI guidance is the re-ordering of the content which, whilst making the flow of information easier to read and understand, makes it hard not to conclude that the ABI have surely re-prioritised their approach. It would, however, be wrong to conclude that the small number of changes made to the NAPF document means a light touch has been taken to updating the guidelines. While few in number, the amendments could have some Remuneration Committee chairmen mulling long and hard over how to implement the recommendations.
Does size matter?
According to the ABI, yes. The very first section of the updated guidance is “Quantum”. Putting this hot topic prominently at the beginning of the general guidance strongly indicates that the size of remuneration packages is a priority for the ABI – perhaps not a surprise given the recent “shareholder spring”. As if to reinforce the notion that size is so important, the guidelines now also refer specifically to “excessive” remuneration. Companies therefore now need to consider separately whether remuneration is deserved and, even if deserved, whether it is excessive. After all, “excessive remuneration”, say the ABI, “adversely affects [a company’s] reputation”.
Describing what constitutes excessive is a bit like describing an elephant – not easy but you’ll know it when you see it (and you can almost guarantee shareholders will spot it). Remuneration Committees will no doubt continue to be caught in the middle of this debate as, ultimately, it is they that need to address the question of whether a package is excessive or simply just deserts.
In a similar vein, companies are now expected, at least by the ABI, to pay no more than is necessary to recruit executive directors. Presumably this means no more than is necessary to secure the service of an individual who is likely to be the most successful candidate available for the role rather than the minimum amount required to fill the role. This feels less like the hypothetical elephant, in that the decisions regarding who to hire and how much they are to be remunerated can only really be judged with the benefit of hindsight.
Public airing of the laundry (on the ten o’clock news?)
The NAPF has added a little 10-word sentence into their guidance that could have Remuneration Committee chairmen choking on their cornflakes: “directors’ contracts should be made available for shareholder inspection online”. Remuneration Committees were already expecting to make the new disclosures required in order to get the “policy” approved by shareholders - having the contracts available on-line feels a bit like asking for the textbook answer to mark the homework against.
Putting the long in LTIPs
Just as the Government has backed proposed reforms to abolish mandatory quarterly reporting, the ABI are keen to move companies’ focus from short-term to long-term. The updated guidance makes it very clear that one size does not fit all when it comes to LTIPs. The ABI recommend that strategies for the business be clearly linked to LTIP performance periods – presumably the longer the implementation of a particular business strategy, the longer the performance (and retention) period. The need to tie the remuneration package to the company’s goals is again emphasised when considering performance conditions themselves. Not only should the duration of incentives mirror that of the company’s strategies and targets, but the performance criteria should also be linked to the specific characteristics of the business.
This emphasis on tailoring remuneration to the company’s specific circumstances is also picked up the NAPF (in fact, it could almost be a copy and paste job). Having these two bodies sing from the same hymn sheet (didn’t they used to issue joint guidance?) only emphasises investors’ expectations that Remuneration Committees will have to look beyond EPS and comparative TSR for performance conditions. So, if you are planning next year’s Remuneration Committee agenda you may need to include a little extra time to make sure your remuneration arrangements are bespoke…enough.
And out of left field…
And just to ensure the NAPF’s amendments weren’t, on the whole, relatively predictable, we now have the recommendation that bonuses be aligned with profits available for distribution. What will this mean for companies that don’t remit their overseas profit?
Unsurprisingly, the update of these guidelines throws up numerous other aspects that Remuneration Committee chairmen will need to chew over, particularly in the current climate.