Welcome to our Employee Incentives Update, we hope you find it useful. This Update contains a round-up of key developments in remuneration during April 2017.
- Enterprise Management Incentive (EMI) plans – HMRC issues guidance for correcting errors on online notifications
- Official rate of interest for beneficial loans reduced from 3% to 2.5% as of 6 April 2017
- House of Commons Business, Energy & Industrial Strategy (BEIS) Select Committee publishes review of corporate governance - we examine the remuneration aspects
- PIRC publishes Voting Guidelines for 2017
- PRA issues Policy Statement on expectations on remuneration
EMI plans – HMRC issues guidance for correcting errors on on-line notifications
HMRC has updated its guidance on EMI options in the Employee Tax Advantaged Share Schemes User Manual. This now includes information on how to correct errors in online notifications in respect of the grant of an EMI option.
Under EMI legislation, HMRC can amend a notification of the grant of an EMI option to correct obvious mistakes. However, notifications must now be made online and it appears that, for technical reasons, neither HMRC nor the company are able to correct an error in a submission that has already been made via the online system.
The updated guidance states that if there is a significant error in an online notification (for example, the number of shares or the exercise price being incorrect), the company should write to or email HMRC within nine months of submitting the notification. HMRC will then tell the company what it needs to do to correct the error.
Where there has only been a minor error (for example, a spelling mistake), the company should make a note in its records and keep this for any future HMRC enquiries. This information may also be needed for due diligence enquiries on a corporate transaction.
It is worth noting that the guidance is solely in relation to an error in the information submitted to HMRC and does not relate to any error in the underlying documentation itself. Where an error has been made in the underlying documentation, we recommend that you seek legal advice in respect of the courses of action that may be available to you.
Official rate of interest reduced from 3% to 2.5% as of 6 April 2017
The official rate of interest was reduced by 0.5% to 2.5% from the start of the 2017/18 tax year. This is relevant for employers who offer employment-related loans to their employees. If the interest charged on an employment-related loan is less that the official interest rate, a taxable notional benefit arises on the difference between the official interest rate and the interest rate actually charged (if any), unless the loan falls within one of the qualifying exemptions. The main exemption relied upon by employers is that for loans to an employee that, in aggregate, are less £10,000 in any tax year in which case no tax charge arises.
PIRC Voting Guidelines for 2017 published
PIRC has updated its UK Voting Guidelines for 2017. These guidelines set out PIRC's views on issues such as board structure, remuneration policy and management of social and environmental issues. PIRC states that "the guidelines give both our clients and the companies we analyse a clear understanding of our view of best practice and, by extension, how we are likely to recommend shareowners vote on particular issues".
This year changes to the guidelines have focused on the composition and actions of the Board with only minor changes being made to the section dealing with executive remuneration. Here the key change is a call for all companies to disclose, on an annual basis, details of any remuneration consultants used and their fees (currently UK companies listed on the main market companies are required to disclose this information under Schedule 8 to the Large & Medium-sized Companies & Groups (Accounts & Reports) Regulations 2008 but this obligation does not extend to AIM listed companies or overseas companies listed on the main market).
A copy of the PIRC guidelines can be purchased via the PIRC website.
BEIS Select Committee publishes report on corporate governance
The House of Commons BEIS Select Committee has published its review of corporate governance, concluding that "Corporate governance in the UK is still strong and remains an asset to the country’s reputation for doing business". However, it does believe that there is "scope for significant improvements in order to address the changing nature of company ownership in a globalised economy" whilst warning that "a small number of highly damaging examples of corporate governance failure [including the demise of BHS and employment practices at Sports Direct] should not lead to a hasty and disproportionate response". The Committee confirms that it does not believe that there is a case for a radical overhaul of corporate governance in the UK.
The review addresses issues under the broad headings of:
- promoting good corporate governance
- corporate governance in large privately-held companies
- pay; and
- composition of the Board.
Under the heading of "pay", the review concludes that "it would not be helpful for the Government to intervene directly to limit the level of executive pay, nor should it seek to use the tax system to further redistribute income for the highest paid—in all professions, not just in business". However, the review highlights that, in spite of evidence of flattening rates of growth over the last few years, executive pay still remains "fabulously high and increasingly far removed from the pay of ordinary workers" whilst "the incentives and drivers pushing pay up are strong; those of restraint are weak". The Select Committee considers that this is an imbalance that needs to be corrected in the interests of business and the broader interests of society.
The review recognises that the job of leading a major company is extremely taxing and requires great skill and commitment and so these roles, given their importance, should be appropriately rewarded. However, it notes that overall pay levels have now been ratcheted up to levels so high that it is "impossible to observe a credible link between pay and performance. At a time when average pay has remained relatively stable, these increases have served to undermine public trust in business".
The recommendations in respect of remuneration include:
- Bonuses: that companies make it their policy to align bonuses with broader corporate responsibilities and company objectives and take steps to ensure that they are genuinely stretching. Policy in this respect would be considered by the FRC in a newly proposed corporate governance traffic-light rating system.
- LTIPs: that LTIPs should be phased out as soon as possible. No new LTIPs should be agreed from the start of 2018 and existing agreements should not be renewed. The FRC should consult with stakeholders with a view to amending the Code to establish deferred share options rather than LTIPs as best practice in terms of incentivising long-term decision making. The expectation being that deferred share option plans would deliver free shares that crucially contain no company performance conditions that need to be met before the option could be exercised, the quid pro quo for which would be a significant reduction in the level of shares awarded. The review seems to suggest that shares should be released under deferred share options in equal annual tranches over a five-year period – although this aspect of the recommendation is unclear.
- Overall pay structure: the FRC should develop guidelines for the structure of executive pay with the following features:
- a simpler structure based primarily on salary plus long-term equity, to divest over a genuinely “long-term” period, normally at least five years, without large steps;
limited use of short-term performance-related cash bonuses, which should be aligned, where possible, to wider company objectives or corporate governance responsibilities; and
- clear criteria for bonuses: the criteria for a bonus payment should be genuinely stretching and incentivise executives to out-perform rather than just acting as a reward for routine achievement.
- Shareholder approval: the FRC should revise the Code to include a requirement for a binding vote on executive pay awards in the following year, in the event that, in any year, over 25 per cent of votes cast are against the advisory vote on the Directors' Remuneration Report. This requirement should be included in legislation at the next opportunity.
- Remuneration Committees (employee representation): employee representation on remuneration committees would represent a powerful signal on company culture and commitment to fair pay. This option should be included in the Code and the Select Committee expects leading companies to adopt this approach.
- Remuneration Committees (chair): any chair of a remuneration committee should normally have served on the committee for at least one year previously. To further incentivise strong engagement, the chair of a remuneration committee is expected to resign if remuneration proposals do not receive the backing of 75 per cent of voting shareholders.
- People policy: companies should set out clearly their people policy, including the rationale for the employment model used, their overall approach to investing in and rewarding employees at all levels, as well as reporting clearly on remuneration levels on a consistent basis. The FRC should consult with relevant bodies to create guidance on implementing this recommendation for inclusion in the Code.
- Pay ratios: the FRC should work with other relevant stakeholders on the detail and amendments to the Code to require the publication of pay ratios between the CEO and both senior executives and all UK employees. Government should require equivalent pay ratios to be published by public sector and third sector bodies (i.e. the range of organisations that are neither public sector nor private sector and which includes voluntary and community organisations (both registered charities and other organisations such as associations, self-help groups and community groups), social enterprises, mutuals and co-operatives) above a specified size.
These are clearly wide-ranging recommendations which, in many cases, go beyond the proposals set out in the Government's Green Paper on Corporate Governance published in November 2016. It will be interesting to see to what extent (if any) the Government's response to the Corporate Governance Green Paper consultation is shaped by the Select Committee's report.
PRA issues Policy Statement on expectations on remuneration
The PRA has published a policy statement on its expectations on remuneration (PS7/17). The annex to the policy statement contains a unified supervisory statement on remuneration (SS2/17) which sets out the PRA’s expectations on how firms should comply with the requirements of the Remuneration Part of the PRA Rulebook. The supervisory statement covers the following areas:
- material risk takers;
- application of malus and clawback to variable remuneration;
- governing body/remuneration committees;
- risk management and control functions;
- remuneration and capital;
- risk adjustment (including long-term incentive plans);
- personal investment strategies;
- remuneration structures (including guaranteed variable remuneration, buy-outs and retention awards);
- deferral; and
- breaches of the Remuneration Part rules.
The supervisory statement is designed to replace a number of previous statements and letters issued by the PRA, details of which can be found in the overview section of the supervisory statement.