No Images? Click here ![]() The IA Principles of Remuneration and Glass Lewis' 2020 GuidelinesThe Investment Association and Glass Lewis have today both published their updated guidance ahead of the 2020 AGM season. For The IA, the revised Principles of Remuneration build upon the guidance which was set out in September 2019 (which was covered in our previous briefing (www.fit-rem.com) which focused on their approach in relation to pension provision. In the covering letter which accompanies the revised guidelines, The Investment Association has highlighted the following areas of focus. Alternative remuneration structuresIts members are increasingly of the view that traditional LTIP structures (performance shares) are not working as effectively as they could for all companies and encourages all Remuneration Committees to evaluate whether the current approach is appropriately aligned with the company’s strategy. There is a reference to the recent research from the Purposeful Company (which covered the broader use of different types of restricted share arrangements) and notes that, on the back of this report, The IA's members commit to working with companies to consider the circumstances in which these may be used more widely in the UK market.FIT Comment:This would appear to reflect a slight softening of shareholder views on the use of alternative incentive structures and we expect an increasing number of companies to take this opportunity to explore the use of restricted shares for Executive Directors. As is already the case, we expect that any such proposal put to shareholders would need to be based on a clear explanation of why this is appropriate for the business given its particular circumstances and supported with a range of “shareholder protections” as well as at least a 50% discount in the award level compared to traditional performance shares. The Purposeful Company report suggests a lower (40%) discount may be appropriate given the need for formulaic underpins to restricted shares, which may be difficult to sell to shareholders, but probably reflects the greater flexibility in how this is applied when implemented below Board. In any case, the updated Glass Lewis guidelines (explained below) also explicitly reiterates the expectation of a minimum discount of 50%. See our briefing on The Purposeful Company's report here. Discretion on vestingThis section has been updated to include the “suggestion” that Remuneration Committees build into their incentive plans a mechanism which would allow them to limit the outcomes above a specific monetary value. Companies would be expected to determine the limit and how best it should be implemented.FIT Comment:This is actually less about the use of discretion, but more an attempt to cap the absolute amounts which can be earned. Most Remuneration Committees already have discretion to determine if incentive outcomes are appropriate, irrespective of the formulaic outturn, based on a broad set of factors including the stakeholder experience. Now The IA are effectively saying that the value of LTIP payments (as bonuses are almost universally capped as a percentage of salary) should also be capped on vesting to avoid excessive values being generated. There are clearly difficulties with setting a cap which is meaningful for shareholders but does not create a disincentive to outperform for participants. This has some merit within atypical plans, such as highly geared Value Creation Plans, but we see little need with most traditional plans. It is possible that, over time, companies will gravitate towards a market standard cap (e.g. no more than 3x the face value of award) but, in our view, there will be a slow uptake of such a specific provision until this becomes a voting issue for shareholders. Instead we expect most companies will continue to apply the broader discretion when reviewing outcomes. Approach on pensionThe IA has reiterated their previous guidance in September 2019 that pension contributions for executive directors should be aligned with those of the majority of the workforce and that members expect there to be a credible plan to reduce contributions of incumbent directors to that level by the end of 2022. Members expect that companies will disclose the pension rate considered to apply to the majority of the workforce and explain how this was derived. FIT Comment:Pension alignment was perhaps the main hot topic during the 2019 AGM season, and we expect this to continue to be an issue as the majority of FTSE All Share companies consider their next policy review in 2020. However, the pressure to align has now extended to incumbent directors. The IA are clear that no compensation should be offered elsewhere in the pay package for changes to incumbent pensions, so there is likely to be significant resistance from Executive Directors to make changes at this stage if this is not an actual voting issue. However, some companies may feel compelled to act now (earlier than they hoped for), particularly if it is to be used as a quid pro quo for changes elsewhere in the policy. Post-employment shareholding requirementThere is an expectation that all new policy approvals will contain a post-employment shareholding requirement (with the Principles making clear this should be for at least two years post-cessation and should apply to a level equal to the lower of the shareholding requirement or the actual shareholding on departure).FIT Comment:We think it will be difficult to put a new policy to approval in 2020 without some form of post-cessation shareholding requirement. However, current practice suggests less than one-third of companies have a post cessation shareholding requirement and the majority of these are not operating the guidelines in accordance with the strict IA approach. Again, we are seeing this become a key issue for some shareholders, particularly LGIM. Levels of RemunerationA continued scrutiny from members on any increases in pay levels, whether fixed or variable.FIT Comment:There is an expectation now that even base salary increases which are in line with the workforce require some level of justification given the multiplier effect (through pension, bonus and LTIP awards) on the overall remuneration package. Pay for PerformanceMembers expect there to be robust explanations for why remuneration pay-outs are appropriate. This rationale is expected to be clear across both financial and non-financial measures. Strategic and personal targets and outcomes should be disclosed separately.FIT Comment:The separation of strategic and personal measures may lead to some presentational changes in terms of disclosure, but shareholders have been pushing for greater levels of transparency for a number of years so this is not a new issue. We are experiencing mixed views from investors as to the weighting on ESG factors which they will support and whether there should be a financial underpin. This is likely to be an increasing area of focus. Other notable changes in the actual Principles are:
Glass Lewis has also today updated its UK proxy voting guidelines. The main summary of the changes in relation to remuneration are:
FIT Comment:The changes in guidance from Glass Lewis largely reflect developments in UK market practice. The most notable change is specific referencing to the majority of the workforce for pension alignment, which is consistent with The IA position, but a step further than the UK Corporate Governance Code (which just refers to alignment with the wider workforce). However, they are less prescriptive in terms of the sanctions they would impose for misalignment or the timeframe they expect in which incumbents to be realigned. Interestingly, they have set out a more flexible approach to company’s recognising a significant fall in share price: ISS and The IA feel that the next LTIP grant should be reduced to avoid the number of shares being granted from increasing, whereas Glass Lewis appear to recognise that there could be other ways of addressing this (such as by reducing the bonus outcome). 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. Rory Cray Darrell Hare Matt Higgins John Lee Sahul Patel Iain Scott Katharine Turner This email is confidential. If you are not the intended recipient, please delete the email and do not use it in any way. FIT Remuneration Consultants LLP (FIT) does not accept or assume responsibility for any use of or reliance on this email by anyone, other than the intended addressee to the extent agreed in the relevant contract for the matter to which this email relates (if any). Consistent with data protection regulations, if you would like to review our records relating to your contact details or to request their removal from our systems, please contact us at info@fit-rem.com. While all reasonable care has been taken to avoid the transmission of viruses, it is the responsibility of the recipient to ensure that the onward transmission, opening or use of this message and any attachments will not adversely affect its systems or data. No responsibility is accepted by FIT in this regard. FIT is a limited liability partnership registered in England under registered number OC364396, with its registered address at 5 Fitzhardinge St, London W1H 6ED. |