The Association of British Insurers (ABI) has updated its Principles of Remuneration. The Principles set out the views of ABI members on the role of shareholders and directors in relation to remuneration and the manner in which remuneration should be determined and structured. They consist of a set of over-arching principles supplemented by general guidance.
The ABI notes that its review has taken place against the backdrop of regulatory uncertainty, namely the legislation progressing through Parliament as a result of the Government's recent consultation on proposals to give shareholders enhanced voting rights on executive remuneration and improving executive remuneration reporting. As a result, the ABI sees no need for major changes at this time, although it has updated a number of areas to reflect current investor views.
In addition, the ABI has set out the themes ABI members will be focussing on in 2013 and its initial views on guidance for the new executive remuneration reporting regime which will come into force for listed companies from 1 October 2013.
Key changes to the Principles
- The Principles have been updated to provide a clear preference for simple remuneration structures (that is, one annual bonus incentive and one long term incentive) – the Principles do not seek to prescribe or recommend any particular type of scheme as that is a matter for the Remuneration Committee.
- The guidance on performance measures for long term incentives has been updated to include reference to operational measures. Again the ABI believe that the choice of appropriate measures is a matter for the Remuneration Committee, which should select the most appropriate performance conditions to incentivise the management to achieve the corporate strategy.
- The underlying guidance has been restructured to make it more user friendly.
Themes for 2013
ABI members believe that Remuneration Committees should be mindful of the following issues when considering the structure of executive remuneration:
- simple remuneration structures are encouraged with one annual bonus and one long term incentive;
- the remuneration structure and performance measures should be clearly linked to the delivery of the Company’s strategy;
- the Remuneration Committee should ensure that the performance period for long term incentives is aligned with the timing of the implementation of the company’s long term strategy (ABI members request that Remuneration Committees consider whether performance or holding periods should be increased);
- Remuneration Committees should clearly demonstrate the link between pay and performance, and provide clear and concise disclosures which help shareholders make informed voting decisions;
- shareholders continue to be mindful of employee costs generally, and executive pay specifically, in the context of the general finances of the company, including its investment and capital needs and returns to shareholders; and
- when considering salary increases for Executive Directors, Remuneration Committees should be cognisant of the salary increases for employees in the wider workforce.
Guidance on the new remuneration reporting framework
The BIS consultation on Remuneration Reporting outlined the importance of guidance on the level of detail, and type of information, that should be reported under the proposed remuneration regulations (click here to see our July 2012 article on the subject). The ABI notes that, as the consultation has only recently closed, and final details of the reporting requirements are awaited, it is too early for it to provide any firm guidance.
However, as the ABI expects a number of companies will want to start reporting in accordance with the new regime, it has outlined its members’ expectations in this regard as follows:
- General aspects
Remuneration Reports should provide context of why the Committee has made the decisions it has made and why [sic]. Investors want companies to avoid boiler-plate or narrowly legalistic disclosures.
Under the current proposals, there is no specific requirement for companies to disclose the Committee's positioning of remuneration potential against peers. Investors find this form of disclosure informative and think it should be included as a matter of course.
- Policy table
Investors would expect the policy table to be disclosed annually, so they can easily locate the policy currently in force and consider how it has been implemented.
If the Policy Report is being put to a binding vote, the Committee should clearly outline any changes in policy and explain why they are being made.
The key aspect will be the level of detail provided by companies in the Policy Table; and, in particular, the need to strike the right balance between providing enough flexibility for companies to attract and retain the right employees and for investors to have sufficient detail to ensure the policy has sufficient boundaries. Members are seeking the following disclosures within the Policy Table:
- Basic salary – the scope of any future salary increases should be outlined. This could relate to an amount above inflation, or to increases in line with the general workforce. There could be exceptions for new hires or changes in responsibilities;
- Annual bonuses – the level of bonus at threshold, target and maximum should be disclosed. The weighting of financial and non-financial measures should also be included, as should level and terms of deferral;
- LTIPs – normal and maximum grant sizes should be disclosed, as well as the performance metrics and actual vesting schedule against performance conditions; and
- Pensions – details of pension contribution rates and any other contractual provision relating to pensions should be disclosed. The Policy Table should include a section on recruitment of new Directors. This may include the treatment of any recruitment awards, particularly what performance conditions would be attached, and how the Committee will calculate the size of awards based on the forfeiture of awards from a previous employer.
- Service contracts and exit payments
Companies should disclose their definitions of good and bad leavers and the approach they will take with each type of leaver for each element of pay.
The expectations are set out in a new Appendix 1 of the Principles of Remuneration. To see a full copy of the revised Principles, click here.