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Tapestry
Alert: UK - Investment Association Remuneration Principles
November 2015
Dear Client,
In this alert we update on the Investment Association Review of the
Principles of Remuneration issued this week.
Investment
Association Principles of Remuneration for 2015
The Investment Association has now
published its updated Principles of Remuneration for 2015 along with
its annual letter to remuneration committee chairmen.
Key points
1. Change to
the Principles of Remuneration: LTI Performance and Holding Periods
The Investment Association has recommended that performance periods
should last at
least three years and that additional holding periods are expected
so that the total period of performance and holding periods should
last at least five
years. Note that where this period should have
previously been ‘considered’, it is now expected. This
is the only change that has been made to the principles themselves.
Tapestry
comment:
Remuneration
committees will now need to consider whether their company’s plans
will meet this five year expectation. We have done research of the
FTSE 100 which looks at and compares the retention periods. 47%
of companies in the FTSE 100 had disclosed retention periods in their
remuneration reports for 2014. Some had tried to address the
retention period through having detailed shareholding guidelines
which now will probably not be sufficient. In our research we
also covered the use of malus and clawback which shows that all the
FTSE 100 companies had implemented them but what they introduced
varied considerably. If you would like a copy of
our research please contact Gabby.
2. Annual
letter - Issues of concern to shareholders
The IA have re-emphasised the following views of their members.
Salary Increases
The fundamental shareholder view is that salary for executives should
only increase either with inflation or in line with salary rises for
the rest of the workforce. Members are concerned about the regular
salary increases for executive directors which they are seeing that
do not appear to be justified. Any increases in remuneration packages
should be justified clearly and explicitly.
Bonus disclosure
An important component of the pay for performance principle is the
use of retroactive disclosure in the Directors Remuneration Report
(DRR). There is still concern surrounding companies who are
relying on the “commercial sensitivity” exemption to provide
protection from non-disclosure. To target this members of the IA have
asked IVIS to give a “Red Top” to the DRR of companies who don’t
commit to full disclosure and an “Amber Top” if no disclosure date is
given. This applies to companies with year ends on or after 1 December 2015.
Service
contracts
The majority of members believe notice periods of up to 12 months
should be the standard approach. Members believe that service
contracts should have equal periods of notice for both the company
and the director. Withholding of pay is suggested where there is
ongoing discretionary proceedings or investigations into misconduct.
Pensions
The IA members continue to be concerned with the large increase in
pension amounts. Members believe that all arrangements
should be in line with those throughout the company and complex
provisions for executive directors should be avoided.
Recruitment and
leavers
Recruitment arrangements and buyout awards are equally scrutinised
for the shielding of risk in favour of executive directors. It is emphasised
that both executives and the company should bear the risk during
recruitment situations. There are also calls for companies to
fully justify how leavers are treated; in particular to justify how
they treat good leavers.
Tapestry
comment:
These comments
provide guidance for discussions with companies’
institutions. The main area of activity will be the focus
on longer-term incentives by either increasing the vesting period
and/or introducing a retention period. The IA’s Executive Remuneration
Working Group have said that they will have a full review of
the whole area of executive pay and are expected to release their
proposals in Spring 2016. Tapestry will update you when those
proposals are released.
We have worked with
many companies over the last couple of years to introduce retention
arrangements, using different arrangements like nominees and trusts,
and their interaction with malus and clawback provisions.
If we can be of any help please let us know.
  
Janet Cooper
Jordan Levy
Rebecca Campsall
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