New remuneration rules for UK listed companies

Transcription

1 New remuneration rules for UK listed companies 10 key considerations for your first remuneration report under the new regime BRIEFING NOTE

2 NEW REMUNERATION RULES FOR UK LISTED COMPANIES p 3 1. Long term planning p 3 2. Remuneration committee discretion p 3 3. Pre-existing remuneration commitments p 4 4. Recruitment packages p 4 5. Loss of office payments p 5 6. Commercially sensitive information p 5 7. Shareholder approval p 6 8. Single total figure for remuneration p 6 9. Performance periods p Percentage increases in CEO pay p 7 HOW CAN WE HELP? p 8 CONTACTS p 8

3 New remuneration rules for UK listed companies 10 key considerations for your first remuneration report under the new regime Many UK listed companies will now be grappling with some of the practical difficulties posed by the new remuneration report regulations. [1] Although the detailed guidance published by the GC100 [2] is welcome, there are still a number of areas of uncertainty. The binding shareholder vote on remuneration policy, and the prohibition of payments outside of the policy, has made the first report under the new rules vitally important. We have set out below 10 key points for companies to consider when compiling their first remuneration report under the new regulations. 1 LONG TERM PLANNING Plan your remuneration policy for the next three years Although companies can obtain approval of their remuneration policy each year, it is expected that most companies will only go back to shareholders every three years (the GC100 guidance makes clear that investors would not favour the annual approval of remuneration policy as a matter of standard practice). Therefore, it is vital that the policy is sufficiently flexible to cover the potential pay structures that may need to be implemented in that period. There will no doubt be unforeseen circumstances that arise for some companies which necessitate changes to the remuneration policy before the third year, but that should be viewed as an exception rather than the rule. This longer term focus may require a change in mindset for some remuneration committees. 2 REMUNERATION COMMITTEE DISCRETION Identify what discretion the remuneration committee has and ensure it is reflected in the policy A remuneration policy should achieve a balance between flexibility and specificity. The GC100 guidance makes clear that shareholders will not accept a remuneration policy which gives the remuneration committee blanket discretion to apply different treatment to remuneration as it sees fit. On the other hand, a remuneration policy should not simply list all potential remuneration components and the scenarios in which they could be paid. The GC100 guidance recognises that it is acceptable for the remuneration committee to have discretion on certain remuneration decisions, but the extent of the discretion should be disclosed in the remuneration policy. If a remuneration policy fails to adequately disclose the extent of the discretion, that discretion will not be available to the remuneration committee to the extent it would result in a payment otherwise outside of the policy. 1 The new rules will apply to UK incorporated companies listed on the LSE Main Market (and certain other overseas stock exchanges) with a financial year ending on or after 30 September The key changes from the previous regime are a new binding shareholder vote on future remuneration policy and a prohibition on payments outside of that policy, together with new rules on remuneration disclosure. 2 The GC100 and Investor group (which represents both companies and institutional investors) have published guidance on the implementation of the new regulations, which is likely to be viewed as representing best practice. 3

4 Therefore, companies will have to: examine every aspect of their current remuneration arrangements for directors and identify every circumstance in which discretion could be exercised identify any other reasonably foreseeable circumstances in which discretion may be required ensure that the extent of the discretion is fully disclosed in the policy There is no requirement in the regulations to disclose in the policy any further detail about the discretion (for example, the circumstances in which a remuneration committee s might exercise it) though clearly investors would favour additional disclosure. However, where a discretion has been exercised, investors would expect to see in the implementation report full details of the circumstances leading to the exercise of the discretion and why it was necessary. Discretion vs judgement The GC100 guidance makes clear that not all remuneration decisions made by the remuneration committee will involve the exercise of discretion. There will be some decisions which involve the exercise of judgement rather than discretion, for example, determining the extent to which a particular performance condition has been satisfied. There is no requirement to set out in the policy details of all the circumstances in which the remuneration committee may exercise its judgement, nor how that judgement has been exercised (although the guidance states that such disclosure may be helpful to investors in certain circumstances). 3 PRE-EXISTING REMUNERATION COMMITMENTS Identify all existing remuneration commitments and ensure they are reflected in the policy It will be important that the remuneration policy covers pre-existing remuneration arrangements that will pay out after the new policy becomes effective. Although the legislation provides that commitments entered into before 27 June 2012 are exempt from the requirement to be within the approved policy, companies should also make sure that commitments made after that date but before the new policy becomes effective are either in accordance with the new policy or specifically referred to as part of the new policy. The GC100 guidance makes clear that the future policy table must include details of any pre-existing remuneration arrangements that may pay out in the future (for example, unvested LTIP awards). 4 RECRUITMENT PACKAGES Ensure the policy provides for all types of awards that could be made Most companies will want to have the flexibility to award additional incentives to new recruits to the board, either as a signing on bonus or as a replacement to awards forfeited by the previous employer. In order to be able to make these awards, they must be specifically referred to in the remuneration policy. The GC100 guidance states that the policy should contain information 4

5 on the types of award that may be made and how performance and holding periods may be applied. The policy on new recruits will also need to set out the basis on which other remuneration components will be determined, including any relocation package which might be awarded. A maximum level of variable remuneration for new recruits must also be stated. Although there is no requirement to state a maximum salary level for new recruits, the salary would still need to be determined in accordance with the framework of the approved policy. 5 LOSS OF OFFICE PAYMENTS Ensure the policy on loss of office payments is both clear and flexible The drafting of the section of the policy on payments for loss of office will be particularly important, as such payments may only be made if they are within the terms of the policy. The policy will therefore need to balance the need to: retain sufficient discretion to deal with the different types of leaver scenario provide investors with sufficient clarity as to what the costs of termination are likely to be in particular circumstances Although the GC100 guidance suggests that examples of good and bad leaver scenarios should be given in the policy, in reality many terminations are likely to fall somewhere in between (the agreed termination ). Companies will no doubt be waiting to see how market practice develops in this area. 6 COMMERCIALLY SENSITIVE INFORMATION Ensure that you have a consistent policy on the non-disclosure of commercially sensitive information The regulations allow performance targets not to be disclosed when they are commercially sensitive. Given that it is the remuneration committee s decision what information is commercially sensitive, we are likely to see a wide variety of approaches taken by companies. The key will be to decide on the approach to non-disclosure and apply that consistently. Provided the remuneration committee then explains the reasons for non-disclosure and gives an indication of when the information will be disclosed, the requirements of the regulations will be satisfied. However, it remains to be seen what level of explanation will be acceptable to investors. 5

6 7 SHAREHOLDER APPROVAL Even if separately approved by shareholders, share plans must be consistent with the approved policy Companies are used to getting their share plan approved by shareholders, but companies will need to bear in mind that shareholder approval of a share plan will not affect the remuneration policy and vice versa. Therefore, even if a new share plan has been approved by shareholders, the terms of the share plan must be consistent with the previously approved remuneration policy. Otherwise, a company will need to obtain shareholder approval for the amended policy. Similarly, the fact that the approved remuneration policy provides for the grant of long term incentives will not affect the company s obligation under the Listing Rules to obtain shareholder approval for any new long term incentive plan. 8 SINGLE TOTAL FIGURE FOR REMUNERATION Ensure you are prepared for explaining misleading information The calculation of the various elements for the single total figure for remuneration remains a complicated issue. However, aside from ensuring that the figure is calculated in accordance with the regulations, companies also need to be prepared for the potentially misleading message that the single figure can provide. The components of the single figure can relate to performance over varying time periods and therefore it can bear little correlation to performance in the year being reported on. 9 PERFORMANCE PERIODS Consider whether to align performance periods for future incentives to the company s financial year For companies with awards linked to TSR (or other) performance criteria measured from the grant date instead of by reference to full financial years, it is not straightforward to decide how such awards should be reflected in the single total remuneration figure. Companies have to choose whether to include the award in the single figure for the previous financial year and estimate the level of vesting dependent on TSR performance, or include the award in the single figure for the following financial year once the exact vesting level is known. The former approach is probably the most favoured, particularly as the latter approach may result in the double counting of awards if the company changes its performance period for future awards. Companies considering whether to align TSR performance periods with the company s financial year should also look to grant awards as soon as possible after the publication of their results. Investors are generally not in favour of a period of more than three months between the start of a TSR performance period and the grant date (as too much of the performance is already known at the date of grant). 6

7 10 PERCENTAGE INCREASES IN CEO PAY Choose your comparator group carefully The implementation report needs to show the percentage increase in CEO salary, benefits and bonus against the percentage increase in those elements for employees of the group as a whole. Although the general view seems to be that this disclosure is likely to be of little benefit to investors, companies will want to make sure that it is presented in the best light possible. The regulations provide that where it would be inappropriate to use the whole employee population, a sub-group may be used. Therefore, companies intending to achieve as meaningful a comparison as possible may choose: only to include UK employees in the sub group, and/or exclude employees who joined or left part of the way through the period being compared Although there is nothing to prevent a company from changing the sub group each year, any choice of sub group will have to be fully explained. Given the potential for wider variations in CEO pay (either up or down) from year to year compared to employees generally, some companies are also choosing to include information from previous years in order to give some context to the comparison. 7

8 How can we help? Please let us know if you would like to discuss the impact of the new regulations on your business. Our services range from providing a full compliance check for your remuneration report with the new regulations and relevant guidance, to helping with one-off bespoke queries. We can also assist with the drafting of your remuneration policy to ensure that it is both sufficiently flexible for the next three years while also enabling the company to meet all of its existing contractual obligations to directors. Contacts For further information or to discuss the issues raised, please contact one of the partners below: Guy Abbiss - Partner D: +44 (0) T: +44 (0) E: guy.abbiss@abbisscadres.com Jonathan Fletcher Rogers - Partner T: +44 (0) F: +44 (0) E: jonathan.fletcherrogers@abbisscadres.com Disclaimer Content is for general information purposes only. The information provided is not intended to be comprehensive and it does not constitute or contain legal or other advice. If you require assistance in relation to any issue please seek specific advice relevant to your particular circumstances. In particular, no responsibility shall be accepted by the authors or by Abbiss Cadres LLP for any losses occasioned by reliance on any content appearing on or accessible from this briefing note. For further legal information click here. Copying If you would like to copy or otherwise reproduce this briefing note then you may do so provided that: (1) any such copy or reproduction is for your own personal use or if it is made available to any third party it is done so on a free of charge basis; and (2) the briefing note is reproduced in full together with the contact details, disclaimer and any logos as they appear on the briefing note. 8

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