Remuneration guidelines

For some time, the Association of British Insurers (ABI) has each autumn updated its remuneration guidelines and/or produced a circular on current issues of concern. This has been timed so as to influence quoted company remuneration committees and their advisers as they plan remuneration arrangements for the following year. The ABI guidelines have become the benchmark for executive incentivisation for UK quoted companies.

The 2014 update has just been issued. Following the merger earlier this year of the investment affairs section of the ABI with the Investment Management Association (IMA), soon to be renamed The Investment Association, the guidelines will in time probably become known as the “Investment Association” or “IA” guidelines rather than the ABI guidelines.

Aside from the usual wish to restrain the growth of executive pay, more specific items in the circular include:

• Following recent exchange rate movements, the IMA cautions companies against compensating executives for adverse consequences for their remuneration where shareholders will also have suffered
• While in principle the vesting of 25% of a long-term incentive award for reaching threshold performance is not challenged, the IMA is concerned that the combination of too easy a target and awards over ever increasingly large number of shares can mean that this is not an appropriate level at which to start vesting
• Performance/holding periods which are longer than 3 years are “encouraged” (though individual shareholders are known to take stronger views).

In terms of disclosure, it is noted that disclosure of targets and performance against them has ironically actually deteriorated under the new reporting regime introduced this year rather than improved. This is because of the new “commercially sensitive” opt-out. Companies are reminded though that shareholders have still retained interest in this area and that they will be monitoring the situation closely, and so companies should not abuse the protection open to them. The circular also says that it would be helpful if the policy table was included in the annual report each year, even if the whole policy report is not. (By law, the policy report only needs to be included in the annual report when the policy report is being voted on, which is normally only once every three years. For most companies, this first occurred in 2014 and so full policy reports will not need to be included again until 2017.)

The only update to the formal guidelines is to show some concern about the use of allowances in increasing fixed pay. This comment is targeted at the financial services sector where allowances have been used on top of salary to boost fixed pay and so increase the amount of variable pay which can be awarded under European banking rules (now limited for senior employees in the banking sector) without the other consequences of fixed pay. Click here to see our law-now entitled "Bonus cap – Role based allowances are not normally fixed pay". The guidelines do not enter into the debate about whether they are lawful or effective in doing so, but do say that shareholders want visibility of what is happening. Presumably the concern here is that these allowances do not become a cloak for general “pay creep” and an unmonitored way of obtaining larger remuneration.

To see the circular and the updated guidelines, please click here.