directors’ remuneration reports-emerging market practice · 2019. 10. 28. · >vedanta...
TRANSCRIPT
Directors’ remuneration reports - emerging market
practice
Gillian Chapman
Alex Beidas
Clare Peake
Graham Rowlands-Hempel
January 2014
1
Overview
> Regulations finalised
> GC 100 Guidance finalised and updated
> First reports issued – about 11 so far
2
Remuneration reports published so far
> Imperial Tobacco**
> easyJet*
> Thomas Cook
> Lonmin
> Sage*
> Diploma
> Marston’s
> Vedanta
> ITE Group
> Compass**
> Paragon
* FTSE 100
** FTSE Top 50
3
Overview
> Clearly there are some key issues
> We will look at these and emerging market practice
> Our Guide and compliance service
4
Key issues
> Policy – timing issues
> Policy and maximums
> Recruitment, retention and termination
> Single figure
> Other requirements
5
Risks of non-compliance
> An offence to approve a non-compliant report
> Shareholder opposition
> vote against/abstention on remuneration resolutions
> potential legal action?
> Criticism from lobby groups/the media
6
Policy – Timing issues
7
Timing issues
> Start date for policy – market tending to follow GC 100 Guidance –
i.e. policy starts from AGM
> Start date for restrictions on payments – some reports do not specify
> Length of policy – most reports do not specify
> Grandfathering – mixed approach – don’t forget to do it!
8
Policy and maximums
9
Policy and maximums - Salary
What do the Regulations say?
> The policy table must set out in respect of each component of pay:
> “The maximum that may be paid in respect of that component (which may be expressed in monetary terms, or otherwise).”
What does the GC100 say:
> “The maximum must be explained in monetary terms or any other way applicable to the company (for example, a percentage of salary).”
> “There is a requirement to disclose the maximum amount that might be paid”
> “Companies will need to clearly state the “expected maximum” (normal course) but may also wish to consider G.. also disclosing an “exceptional” maximum.”
10
Examples from reports
> “No prescribed maximum”
> “No maximum to avoid setting unhelpful expectations”
> “Ordinarily salary increases will be in line with increases awarded to
other employees in major operating businesses in the group.
However, increases may be made above this in certain
circumstances, for example”G.’
> “ Year on year increases will not exceed 10% per annum”
11
Policy and maximums
Do the Regulations really require a maximum?
> “The maximum [if any?] that may be paid in respect of that
component (which may be expressed in monetary terms, or
otherwise).”
What does the GC100 say:
> Companies will need to clearly state the “expected maximum”
Does it matter?
12
Some suggestions
> “Increases will not exceed x % per year. Any increases above this
will be included in the policy for the relevant year and approved in
advance by shareholders”
> “Increases will not be higher than the average increases awarded to
other employees in the group”
> “Increases will be in line with the average increases of our major
competitors being [list]”
> Take care with currencies
13
Policy and maximums - Benefits
What do the Regulations say?
> The same as for salary ie “The maximum that may be paid in respect of that component G..”
What does the GC100 say:
> “Must give a maximum.” Gives factors to consider.
But it can be difficult to give a maximum because:
> The costs can change dramatically from year to year
> They can be very broad and very different for each directors.
Is it necessary to list each type of benefit and give a maximum? Cost or value?
14
Examples from reports
> “No maximum”
> “Benefits may include those currently providedGhowever, the
Committee reserves the right [to provide others]”
> “The level of benefits is fixed”
> “The maximum benefit that can be offered is:
> Car allowance £15,000
> Life insurance of 4 x base salary” etc
> “Benefits are not expected to exceed [ ] % of salary”
15
Some suggestions
> “Current benefits are listed in the implementation report. [The
Cost/Value] of benefits will not exceed [ ]% of salary except in the
case of [director] where relocation expenses are not expected to
exceed an additional [ ]% of salary”
> “Benefits are listed in the [implementation report]” on page [ ].
Increases during the policy period will not exceed [ ]% per annum”.
> “ Benefits provided are listed below with the maximum amounts.
Increases are not expected to exceed [ ]% per annum.”
16
Recruitment, retention and termination
17
Policy on recruitment remuneration
What do the Regulations say?
> Have to state:
> the principles to determine a recruitment package
> each component of the recruitment package
> maximum level of variable remuneration excluding buy-out awards
What does the GC100 Guidance say?
> Note: too much detail could raise expectations and weaken the
company’s negotiating position
18
Principles to determine a recruitment package
> Pay sufficient to attract, motivate and retain candidates of right
quality
> Taking account of quality, skills, experience, market standing, current
remuneration, internal relativities etc
> Without overpaying
19
Components of recruitment package - Examples
> “Normal” package
> Buy-out award
> explain approach – quantum, performance conditions, vesting period
> no maximum
> Recruitment award
> explain approach – circumstances, quantum, terms (eg. additional LTIP/LR9.4.1)
> maximum
> Relocation package
> explain approach – circumstances, components etc
> maximum
> Anything else?
20
Disclosure of recruitment package
GC100 Guidance
> Consider disclosing recruitment package in RIS notification of
appointment
> Consider a full explanation of buy out/recruitment awards
21
What about internal appointments?
> Should be covered by recruitment policy – GC 100 Guidance
> Commit to honour existing commitments
> Specify potential payments?
> increase in base salary
> top up LTIP award
> relocation
> Disclosure
22
What about retention payments?
> Have to be within policy
> Use exceptional circumstances carve out in LTIP (if any)?
> Include as a separate component in policy table?
> Include as part of recruitment policy?
> Principles and maximum?
> LR 9.4.1
23
Policy on termination payments
What do the Regulations say?
> Have to state principles to determine termination payments including:
> indication of how each component will be calculated
> whether/how the circumstances of loss of office/performance are
relevant to the exercise of any discretion
> pre-27 June 2012 arrangements that may affect quantum
24
Termination payments - Examples
> Notice terms
> PILON payment (NB: mitigation)
> Annual bonus – for year of departure?
> Share plans
> how determine “good”/”bad” leavers
> good/bad leaver treatment
> exercise of discretions
> Pension
> Other payments – relocation, continuing benefits, legal fees etc
> Summary dismissal
25
Website disclosure of termination payments
What does the Companies Act say?
> Have to disclose remuneration/termination payments made or to be
made after director has stepped down
> Including how calculated
> On the company’s website
> As soon as practicable once director has stepped down
> Until next remuneration report made available on website
26
Website disclosure of termination payments
What does the GC100 Guidance say?
> Disclosure when departure is announced?
> RIS announcement on departure?
> Disclosure of NED fees
Points to note
> Disclosure of continuing share awards
27
Single figure
28
Single figure
> Performance targets – most describe targets for bonus in
implementation report, rather than in policy
> Benefits
> Exercise of discretions
> Presentation – some variations in layout. Some reports include extra
columns
> Promotions/Leavers
> HMRC plans – most reports are not clear if these have been included
in the single figure. One report includes them in the LTIP value
29
Other requirements
30
Other requirements
Remuneration reports must also cover:
> Consultation with shareholders and employees
> Relative importance of spend on pay
> Voting history
> TSR graph and table of historic CEO pay
31
Consultation with shareholders - Requirements
What do the Regulations say?
> The report must include a statement of whether/how the company has
taken account of shareholders’ views in setting remuneration policy
What does the GC100 say?
> GC100 suggests companies go beyond the requirements in the
Regulations:
> actions taken by company and shareholders to engage with each
other
> broad topics discussed and an indication of shareholder reaction
> any changes made as a result
32
Consultation with shareholders – How have companies
complied?
> So far, there seems to be a general move in the right direction
> Some common themes:
> emphasis on shareholder engagement in the Chairman’s letter and
in a separate paragraph in the policy report
> strong commitments to consult as and when changes are
proposed
> there is a tendency not to describe detailed topics discussed and
shareholder reaction
33
Consultation with shareholders – Some common
phrases
> “Committed to ongoing dialogue”
> “Open and transparent dialogue”
> “Consult extensively”
> “Welcome shareholder feedback”
> “Take into account the views of significant shareholders”
34
Consultation with employees
What do the Regulations say?
> The report must include a statement of how pay and conditions elsewhere in the group were taken into account when setting directors’ pay, and whether/how employees were consulted
> Details of any comparison measurements used
How are companies addressing this?
> Companies are complying, but not consulting
> Little has changed from disclosures under the old rules
> Some reports include a statement that conditions elsewhere have been taken into account
> Little explanation of failure to consult
> Some companies will address this more fully, so practice will develop
35
Relative importance of spend on pay
What do the Regulations say?
> Companies must disclose spend on pay, retained profits, dividend/buy-backs and “other significant distributions and payments”
> Comparison with previous year and explanation of “other” items
> in graph or table form
> no definitive guidance on what “other” means – GC100 says they should be “suitable and relevant” and have a longer term focus
> some inclusion of other items – capital expenditure, underlying pre-tax earnings, overall directors’ pay
> explanation of “other” items?
36
Voting history - Requirements
What do the Regulations say?
> Reports must set out voting results in respect of the last
remuneration report
> Reasons for/actions taken as a result of a “significant” vote against
What does the GC100 say?
> Suggested format given
> Other relevant resolutions to be included
> Views 20% vote against as “significant”
37
Voting history – How have companies complied?
So far, so good?
> Companies with more than 20% against have provided further
explanation
> Those with between 5% and 20% against have also chosen to
explain further
> Other relevant resolutions have been included
> Some action has been taken as a result of a significant vote against
38
TSR graph - Requirements
What do the Regulations say?
> Companies must include a line graph comparing TSR with an
appropriate index over five years, rising to 10
> Largely the same as the previous requirements
What does the GC100 say?
> Explanation of method for calculating TSR
> Link to comparator group for performance conditions
Other information can be added to the graph, and some companies
have included multiple indices/comparator groups
39
CEO pay table
What do the Regulations say?
> Companies are required to include a table setting out CEO pay for
the same period as the TSR graph, covering:
> total pay based on single figures
> bonus paid (as % of maximum bonus potential)
> vested LTIP awards (as % of maximum vesting potential)
> Companies have complied and it’s clear that the position can be
complex, e.g. with multiple CEO changes
40
CEO pay vs employee pay
What do the Regulations say?
> Companies are required to disclose the increase in CEO pay, relative to group employees
> Based on single figure disclosures
> Group employees generally, or chosen comparator group
What has happened?
> A slightly higher proportion of companies have used a comparator group than the whole employee population – expect this to increase?
> Examples of comparator groups include UK employees and management population
41
Questions