Executive briefing – November 2022

Glass Lewis 2023 guidelines and UK Autumn Statement

Our latest executive briefing covers the Glass Lewis 2023 proxy voting guidelines and some of the remuneration related announcements made at the UK Autumn Statement.

Glass Lewis 2023 guidelines

Glass Lewis has published its 2023 proxy guidelines; the new guidelines contain a number of noteworthy changes to the previous version, as follows:

Linking pay to E&S criteria: Where companies have not included explicit environmental or social indicators in their incentive plans, Glass Lewis expects to see additional disclosure on “how the company’s executive pay strategy is otherwise aligned with its sustainability strategy”. It also continues to believe that where E&S metrics are incorporated into remuneration plans they should be tailored to reflect each company’s unique circumstances and sufficient disclosure should be provided to allow investors to understand how the chosen criteria align with company strategy.

Use of discretion: Glass Lewis has expanded its guidance on the exercise of Remco discretion in relation to incentive payouts. It calls for companies to provide “thorough discussion” of how significant events were considered by the Committee, whether it resulted in the exercise of discretion or not. It provides a couple of examples of relevant events, such as the exclusion of one-off accounting charges or the occurrence of health and safety failures that are not otherwise captured in LTI metrics.

Pensions: Pension provisions for executive directors, both those newly appointed and incumbent executives, are expected to be in line with those available to the majority of the wider workforce by the end of 2022. This is consistent with the ‘direction of travel’ that has been signalled by other UK institutional investors/ proxy agencies for some time, and will not be a surprise to most UK remuneration committees.

Overboarding: Glass Lewis has updated its guidance on acceptable levels of ‘external commitments’ for directors. Executive officers will generally be considered to be overboarded if they have more than one additional external plc role (reduced from two previously). Non-executive board chair positions at UK and European companies will be considered as two board seats given the increased time commitment associated with these roles.

Combined incentive plans: Glass Lewis has provided specific guidance on ‘combined incentive plans’ (also known as ‘omnibus’ or ‘bonus banking’ plans). These aggregate elements of a bonus and long-term incentive, whereby awards are subject to short-term performance with a portion deferred, subject to time-vesting restrictions or other performance criteria. Glass Lewis will generally vote against this type of plan unless:

• there is a substantial reduction in the total target and maximum award opportunity from the existing variable remuneration structure (to reflect the reduced risk profile);
• the plan has a minimum vesting period of three years;
• part of the award is allocated in equity or equity-based instruments, subject to time-vesting restrictions;
• quantitative underpin/gateway conditions are in place for the deferred portion of the award; and
• a compelling strategic rationale for the plan is provided.

Committee accountability: Glass Lewis has clarified that it may recommend voting against the entire RemCo based on “egregious remuneration practices”, including situations that have persisted for several years. It gives examples such as approving large one-off payments, the inappropriate use of discretion in determining variable remuneration, and/or sustained poor pay-for-performance practices.

Diversity (gender and ethnicity): Glass Lewis will monitor companies progress towards 2023 market best practice regarding gender and ethnic diversity. It will consider recommending against the nomination committee chair in subsequent years in cases where a board has made insufficient progress and has not disclosed any cogent explanation or plan to address these issue.

Cybersecurity risk: Glass Lewis will generally not generally make voting recommendations on the basis of a company’s oversight or disclosure concerning cyber-related issues. However, it will closely evaluate a company’s disclosure in instances where cyber-attacks have caused significant harm to shareholders and may recommend against appropriate directors should it find such disclosure or oversight to be insufficient.

UK Autumn Statement

Jeremy Hunt, the latest Chancellor of the Exchequer, yesterday announced his ‘Autumn Statement’.  From an executive remuneration perspective, there were a number of significant announcements in the Autumn Statement. We have summarised these below, as well as some of the ‘emergency’ announcements made previously by Mr Hunt when he first took office last month.

• Reduced 45% tax threshold: The threshold at which UK taxpayers will begin to pay the highest (45%) rate of tax will be reduced from £150,000 (for 22/23) to £125,140 (for 23/24). The net effect is that significantly more UK taxpayers will be subject to the 45% income tax rate and those already earning more than £150,000 will have additional tax to pay (c.£1,250 p.a.). Some companies may consider paying bonuses before the end of the current tax year on 5 April 2023, to avoid the increased employee tax charge. However, as the benefit of accelerated payment is relatively limited, this may not justify significant extra administration for employers.
• Reduction in CGT annual exempt amount: This will reduce from £12,300 (22/23) to £6,000 from April 2023 and to £3,000 from April 2024. The current exempt amount is useful, especially for modest capital gains, and the upcoming reduction may motivate some employees to sell some/ all of their shares in the current tax year to utilise the current exempt amount (use it or lose it). Going forwards, the reduction could impact tax-advantaged share schemes such as SAYE; the reduced exempt amount means that participants are more likely to trigger a chargeable gain and, therefore, require filing of a tax return to HMRC (which in turn will likely trigger questions for companies/ share plan administrators).
• Increase in CSOP limit: The previously announced increase in the limit for tax-advantaged CSOP options from £30k to £60k is confirmed as still going ahead. Please see our previous briefing here for further details.
• Scrapping of the bankers’ bonus cap: Kwasi Kwarteng announced the removal of the 2:1 cap on variable to fixed pay for CRD firms. No further announcement was made by the Chancellor yesterday and it appears that this is one of the few policy announcements of the Truss government to have survived. We await further announcements from the government regarding the detailed changes to current PRA/ FCA remuneration codes. 
• Planned increase in corporation tax rates: UK corporation tax rates will increase to 25% from April 2023; this was announced last month by Mr Hunt and is a reversal of the approach announced in September by Mr Kwarteng. As we have noted previously, a rise in corporation tax rates means that performance metrics calculated on a post-tax basis (such as EPS), could become harder to satisfy.

If you wish to discuss anything arising from this briefing, please ask your usual contact at FIT or call us on 020 7034 1111 or email us at Info@fit-rem.com. 

This paper is intended to be a summary of key issues but is not comprehensive and does not constitute advice. No legal responsibility is accepted as a result of reliance on the contents of this paper.

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