Following a busy year for executive remuneration and share plans, this briefing sets out an overview of some of the most topical issues that we are currently discussing with clients.
UK Corporate Governance Code
The FRC has published a revised version of the UK Corporate Governance Code which applies to UK listed companies for reporting years beginning on or after 1 October 2014. The key changes in the 2014 edition of the Code relating to directors’ remuneration are:
- Remuneration policies – Remuneration policies should be designed with the long-term success of the company in mind (as opposed to being sufficient to “attract, retain and motivate” directors) and the remuneration committee should take care to recognise and manage conflicts of interest when receiving views from executive directors or senior management.
- Claw-back arrangements – Companies are now required to put in place arrangements (or explain why they have not done so) to enable the company to withhold variable remuneration or recover previously paid variable remuneration when appropriate to do so. The Code does not now specify the circumstances for withholding (malus) or recovery (clawback) of remuneration, although most companies will include, as a minimum, a restatement of the company’s results or misconduct of the individual. Companies will, therefore, need to consider whether to amend their bonus and share plans accordingly.
Directors’ Remuneration Reports
Many companies are now gearing up for their second annual implementation report under the new reporting regime, and also considering how to deal with their remuneration policies.
Based on discussions with clients, some interesting themes are emerging:
- Shareholders are seeking continued engagement, but with a move away from pure compliance discussions. Interestingly, the NAPF have said that they would like governance discussions in 2015 to be “more integrated and holistic in nature”, with discussions on remuneration incorporated within conversations about strategy and risk.
- Given that the proxy advisors are likely to have more time this year to focus on actual pay rather than compliance with the new regulations, there is likely to be an increased focus on what level of disclosure will be seen as acceptable in respect of annual bonus performance targets. In particular, given that many companies last year said they would only disclose bonus targets retrospectively on the basis of commercial sensitivity, shareholders may now put pressure on such companies to come good with their disclosures.
- The regulations do not require the remuneration policy approved last year to be set out in full this year unless it has been changed and a new vote is being taken. Instead, companies are permitted simply to make this available on the website and make reference in the remuneration report as to where the policy can be viewed. Conversely, the CG100 Guidance, and the recently published IMA letter (see below), indicates that it may, nonetheless, be useful for shareholders to have the policy included in full in the report. No doubt December year end companies will be looking to the September year end companies for a lead on how to deal with this issue.
- There has been a great deal of debate around whether there should be more disclosure regarding CEO pay relative to other employees (an issue which drew a lot of media attention following criticism of some companies by the High Pay Centre), and companies will need to consider whether to enhance their disclosures in this respect.
Changes to LTIP performance and holding periods
In addition to many companies simplifying the number of incentive plans under which awards are made to executive directors, a number have already taken account of Fidelity’s statement that they will oppose new plans (and not lend their support on other remuneration votes) where the company operates its long-term incentive plan with a holding period of less than five years after the date the award was made. The IMA Guidelines (see below) are not so prescriptive but do specify a performance period of “no less than three years and preferably longer” and that “Committees should consider the use of additional holding periods”. We expect more companies to consider this issue in the coming year.
Revised IMA Guidelines (formerly known as the ABI Guidelines)
The Investment Management Association, which merged with the Investment Affairs division of ABI, has issued its annual update of its remuneration principles: IMA Principles of Remuneration, as well as publishing a letter to remuneration committee chairmen: IMA Letter. The only change of substance from the previous ABI Guidelines concerns the use of “allowances” as part of fixed pay, although the letter highlights a number of issues of concern to shareholders including in relation to increasing levels of variable pay, retrospective amendments to performance targets and amounts receivable at threshold performance.
NAPF 2014 AGM Report
The NAPF has published its 2014 AGM Report, a review of the voting trends from last year’s AGM season. This analysis will inform its annual update of its Corporate Governance Policy & Voting Guidelines in due course. Unsurprisingly given the changes last year, a primary focus is directors’ remuneration and it singles out companies who have had large votes against their remuneration/policy report in successive years or otherwise been subject to heavy investor criticism.
Updating “Approved” Share Plans
Last year, most companies amended their SIP and SAYE plan rules to take account of changes made by the Finance Act 2013. Further changes have been made by the Finance Act 2014. A number of these changes have been made automatically by the legislation, and so we recommend updating plan rules to ensure that they are applied correctly and in accordance with the relevant legislation.
Some of the proposed changes simply reflect changes to the abolition of the “approved plan regime” following the introduction of the new self-certification process for what are now known as “tax-advantaged” plans. Other automatic changes reflect new processes to be followed in specific situations such as adjustments following a variation of share capital.
For SIPs, changes can be made to reflect the fact that dividend shares and partnership shares may be subject to forfeiture, provided they are forfeited for the lower of market value/price paid for the shares (or amount of dividends reinvested).
For SAYE plans, changes can be made to enable SAYE options always to be able to be exercised with tax relief for up to 20 days after a change of control and to clarify that exercise is permitted where a scheme-related employment ends as a result of a business transfer where such transfer is not a TUPE transfer. It will also be necessary for SAYE rules to be reviewed to ensure that the provisions which apply on the death of a participant, are aligned with some small, but important, changes to the legislation.
We also recommend amending CSOP rules to include the ability to exercise options following a change of control with tax relief even where certain of the legislative requirements are no longer met at that point. Without making this change, tax relief would not be available.
Self-Certification, Registration and Annual Filings
Companies will need to “self-certify” their CSOP, SIP and SAYE plans on HMRC’s online portal, and, in doing so, will be confirming that the plans conform with the legislation currently in force. This will need to be done before 6 July 2015. The self-certification is an online process, and through that same process companies will re-register their plans with HMRC.
In respect of annual filings, for both tax-advantaged and non-tax-advantaged plans, there are no longer hard copy annual returns, as these have been replaced with the online process (although the date for filing through the online process remains 6 July following the end of the relevant tax year). Companies will therefore also need to register non-tax-advantaged plans through the same HMRC portal, again by 6 July 2015, in order to be able to make their annual filing. Although the deadline for registration/self-certification is 6 July 2015, we recommend that companies complete the process much sooner.