One way or another, we’d expect remuneration committees of UK listed companies to be looking closely at their remuneration policies this year.
Is your policy still fit for purpose?
Most companies will need to put their remuneration policies to shareholders in 2017 and so discussions about whether the remuneration policy put in place in 2014 is still fit for purpose will be largely carried out towards the end of 2016 for those companies with a 31 December year end (and sooner for those with a September year-end). Policies will need to be reviewed to take account of lessons learned since 2014 and the changing business landscape (after all, Brent crude was over $100 a barrel back in the spring of 2014).
Regardless of timing, this is not a resolution to leave to the last minute to action. If changes are necessary, they are likely to be best considered at a pace that permits reflection and debate with shareholders and representative bodies. And better to allow sufficient time to ensure that potential changes can be discussed with shareholders and representative bodies before being submitted to shareholders at the 2017 AGM.
Choosing the right performance periods
The practice in recent years has been to measure performance of senior executives for the purposes of long-term incentives over three years. Since 2008, it has become clear that the problems arising from earlier business decisions may only become evident after the end of the three-year performance period. Accordingly, there is increasing pressure from certain institutional investors (for example, Fidelity) and proxy advisers (for example, the Investment Association) to extend performance periods or at least to require holding periods to be tacked on to the end of the performance period.
So far, the majority of companies have retained a three-year performance period. The question for remuneration committees is whether it is right to look at extending the performance period or to add a holding period.
Here are two diametrically-opposed perspectives from which to consider this question.
- Does a company want to increase the likelihood of being able to enforce a malus provision (i.e. a provision allowing an unvested award to be reduced or cancelled) rather than relying on a clawback right? Despite recent case law that suggests (at least in England and Wales) that enforcing a clawback provision may not be quite as difficult as thought, given the re-framing of the law on unenforceable penalties, it remains a question yet to be meaningfully tested. Deterrents to relying on these terms include:
- the uncertainty around the enforceability of these kinds of provisions outside the UK;
- the unclear (at best) tax problems with recovering previously paid incentives on a pre-tax basis; and
- the problems with tracing the money if shares have been sold when clawback is invoked.
Leaning on a malus clause is a much more comfortable thing to do. So should the remuneration committee defer the vesting of an award (either by extending performance periods and/or introducing holding periods) to give longer to recover under a malus provision in the event of a problem?
- According to one report released in March 2015, the average time in post of a listed company CEO (at least, a FTSE 100 CEO) is less than six years. What impact will the extension of performance periods (or adding a holding period) beyond three years achieve as far as the “incentive and retention” aspect of LTIPs is concerned if the average CEO may only realise one or perhaps two cycles of awards?
There is no doubt that extended performance periods or additional holding periods are becoming increasingly prevalent. Several companies have introduced (or have announced their intention to introduce) additional holding periods (for example, easyJet, GlaxoSmithKline and Land Securities). This year is the ideal time to review the need and importance of having longer performance periods or additional holding periods not least because in many cases the whole remuneration policy will be under consideration and the introduction of longer performance periods or additional holding periods will be one of the most important aspects of policy that will need to be considered by the remuneration committee.