Executive Pay in a Bind –Share-Based Pay in the UK after the Binding Vote

CHAIRMAN and SPEAKERS

Stuart Bailey, MD UK & Benelux, Accurate Equity (UK)

Paul Randall, Partner, Ashurst LLP (UK)Alan Judes, Managing Director, Strategic Remuneration (UK)

Session objectives

The UK coalition government is making significant changes to how remuneration policy is described and will be giving a binding vote on future policy to shareholders. As a result, remuneration committees, consultants and other advisers will all have new related challenges. This session will look at the potential impact of these changes to share-based pay from the perspectives of both a compensation consultant to the remuneration committee and a legal adviser to the committee. Gain an understanding of how the future use of shares for remuneration purposes may be impacted in this critical session.

Agenda

The changes to company law – Paul RandallThe changes to the disclosure regulations – Alan JudesImplications for share based pay – bothQ&A – Stuart Bailey

Executive pay debate

Debate launched by BIS in autumn 2011 on how to:

• link executive pay in quoted companies more closely to company performance; and

• encourage shareholders to engage more with boards on remuneration issues

"Ridiculous levels of remuneration [in quoted companies] are going unchallenged as the norm, when there is no clear evidence of a correlation with performance" – Vince Cable June 2011

Three-fold approach

More transparency on directors’ pay

Enhanced shareholder voting

rights

Voiding of payments to directors if

inconsistent with approved policy

Scope of the new regimeQuoted companies under CA 2006i.e. UK-incorporated companies listed on the LSE, an EEA exchange, the NYSE or NASDAQ

AIM companies

Overseas registered company with UK listing

(but may choose to comply voluntarily )

New-look directors’ remuneration report

Until 2013

Single Directors’ Remuneration

Report

From 2014

Policy Report: sets out the

remuneration policy for directors

going forward

From 2014

Implementation Report: how the

policy was implemented in the

previous year

More transparency

Relative importance

of spend

on pay

Chart showing

potential

rewards for performance

at different levels

Graph showing

CEO pay

and award rates over

a 9-year period

Comparison of

pay increases

for the CEO and

employees

generally

Information on

remuneration

consultants

Policy on loss of

office payments

Service contract

provisions

on pay

Single figure

for each director’s

total remuneration

Chairman’s

statement

of the key

messages on pay

Examples of

new disclosures

in the DRR

Enhanced shareholder voting rights

Binding

shareholder

vote:

simple majority

Policy

report

Advisory

shareholder

vote:

simple majority

Implementation

report

At least every 3 years

Annually

Payments to directors

Company Director

remuneration

payment for loss of office

Such payments must be consistent with the directors’ remuneration policy most recently approved by shareholders (or separately approved) or else they will be void, whatever the contract says

Directors may be personally liable for unauthorised payments unless they acted honestly and reasonably and the court grants relief

When does the new voting regime start to apply?

• At the AGM in the first financial year which begins on or after 1 October 2013:− a new-style DRR must be produced− the first binding vote on the policy report must be held − an advisory vote on the implementation report must be held

• Work out your relevant AGM date and plan ahead

• Companies with a September or October year end will need to be quick off the mark

When do the restrictions on payments to directors start to apply?• The restrictions start to apply from the earlier of:

‒ the start of the second financial year to begin on or after 1 October 2013 (so 1 January 2015 for a company with a 31 December year end); and

‒ the date from which the company’s first directors’ remuneration policy to be approved under the new regime takes effect

• Payments made after the new regime is in force but under obligations entered into before 27 June 2012 (and not modified or renewed) need not comply with the new regime

What should the start date be for the first directors’ remuneration policy?

Start of 2014 Payments between start of 2014 and date of AGM would have to be conditional on the policy being passed

Date of 2014 AGM Vote passed: restrictions on directors start to applyVote lost: have until 1 January 2015 to convene an EGM to approve a new policy

Start of 2015 Allows time for a new vote at an EGM if the vote is lost

Assuming 31 December financial year end

In future years, the default start date is the date on which the policy is approved, unless a different date is specified

What if shareholders vote against the policy report?• The company must fall back on the last directors’ remuneration

policy approved by shareholders or convene an EGM to approve a new policy

• If the first policy report vote is lost, there is no previously approved policy to fall back on and the company must convene an EGM

• It is, therefore, especially important to get the first policy vote through in 2014 in order to avoid an EGM

What if shareholders vote against the implementation report?

Implementation

vote

is lost

Policy vote at

next AGM

Implementation

vote is lost but

policy vote is

passed at

same AGM

No policy vote at

next AGM (unless

one is due

anyway)

unless

Action points for the policy report• Consider incorporating discretions where appropriate e.g. for new

recruits and good/bad leavers

• Details of LTIP awards for directors must be given even if the plan has already been approved by shareholders

• The exercise/vesting of awards as well as grant should be authorised by the policy

• Don’t forget to include outstanding awards under closed plans

Other action points• Consider making new payment obligations expressly conditional on

being consistent with approved policy at the payment date

• Remember the implications of changing service agreements entered into before 27 June 2012

• Directors’ are potentially liable for unauthorised payments – but relief may be available where they act honestly and reasonably

• Share plans will (probably) still need to be approved by shareholders at adoption

Inputs to governance process in the UK• Companies Act 2006• Large and Medium-sized Companies and Groups

(Report and Accounts) Regulations 2008 NEW RULES and Binding Vote on Remuneration Policy

• EU directives, FSA Guidelines

UK and EU lawUK and EU law

• Listing rules• UK Corporate Governance Code• Model code & Takeover Code• Stewardship Code 2010

Market Rules for UK listed companies

Market Rules for UK listed companies

• ABI Guidelines and Policy Statement• NAPF Corporate Governance Policy • Individual investor guidance, e.g. Standard Life• ISS/RREV Remuneration Guidance

Investor guidelinesInvestor guidelines

Recent developments

ABI has published its latest guidance• ABI Principles of Remuneration – November 2012

NAPF has published its latest guidance• NAPF Corporate Governance Policy and Voting

Guidelines – November 2012ISS has updated its guidance

• November 2012

Department for Business Innovation and Skills• Draft regulations published in June 2012• Revised regulations published in March 2013• Final regulations due in June 2013 to take effect in

October 2013• First AGM affected 2014

• 2014 annual report and accounts• Financial Reporting Lab

• Input on single figure pay v TSR and scenario reporting• Retroaction - restriction on termination and remuneration payments

outside approved policy made after 27 June 2012 unless agreements for payments made before that date

• Unless termination payments and all Remuneration Payments approved by policy, directors liable to make good company losses

Disclosure obligations - 1• Directors’ Remuneration Policy on website• Statement by Chair of Remuneration Committee

• Key messages on remuneration and context in which decisions have been taken and major changes during year

• Single total figure of remuneration for each director • Salary, taxable benefits, pension related benefits, annual incentive,

LTI, total figure, figures for preceding year for each item• Narrative details for any variable remuneration items in single total figure • Total pension entitlements

• Defined Benefit scheme accrued benefits at NRA, early retirement benefits

• Table of LTI awarded in the year

Disclosure obligations - 2• Payments to former directors• Loss of office payments

• Total amount, how each element calculated, incentive awards, how discretion was exercised

• Statement of directors’ shareholding and share interests • Statement of guidelines, whether met, details of scheme interests

• Performance graph: 5 - 9 year TSR v Index – and CEO pay• For each year CEO one figure total pay• Annual variable element award rates against maximum opportunity

used in single figure for relevant year• LTI award rates against maximum opportunity used in single figure

for relevant year

Disclosure obligations - 3

• Relative importance of spend on pay• Graphical form reporting of percentage spend on profit retained,

profit distributed, total pay and director pay, tax paid• Committee and its advisers

• Nature of services provided and fees charges to the Committee and to the company for other services provided

• Statement of shareholder voting• Results of votes approving the remuneration report and reasons for

votes against and any actions taken by the directors

Disclosure obligations - 4• Directors’ Remuneration Policy

• Future policy table• How each element supports short and long-term strategic objectives• Maximum potential value• What performance measures are used, relative weighting of each

and period of time over which measured• Fees and benefits to NEDs

• Approach to recruitment remuneration• Principles for recruitment of new directors, various elements and

approach to each element, maximum salary as percent of highest paid director

• Service contracts• Obligations for loss of office not elsewhere reported

Disclosure obligations - 5• Scenarios

• What could be received under the policy under three scenarios, minimum, on-target, maximum

• Three components fixed, annual variable, LTI (options at Black Scholes model value should be acceptable)

• Loss of office payment policy• Duration of contracts, notice periods, policy for determination of

payments• Statement of consideration of conditions elsewhere in the company

• Whether, and if so, how, the company consulted with employees• Whether any comparison metrics were used

• Statement of consideration of shareholder views• How taken into account

Implications for share-based pay• Quantum

• Much greater scrutiny on grant size and vesting• Design

• Volatility and gearing of options will become apparent• Investors wanting absolute return focus will pressure for them to be

reintroduced• Performance conditions

• Much greater tailoring to support corporate strategy• Estimates will be needed for one-number if vesting can only be

calculated after the publication of the annual accounts• Broad based equity plans

• Will continue as usual!

Contact details

Paul Randall, PartnerHead of employee benefits and incentivesAshurst LLPT: +44 (0) 20 7859 1298E: paul.randall@ashurst.com

Alan Judes, Managing DirectorStrategic RemunerationT: +44 20 8444 8666M: +44 7779 289 747E: alan.judes@gmail.com