Welcome to our Employee Incentives Update, we hope you find it useful.  This Update contains a round-up of key developments in remuneration during November 2017. 

In summary:

Budget Developments

  • SAYE savings holiday period to be extended for those on maternity or parental leave

Corporate Governance

  • Investment Association revises its Principles of Remuneration for Executive Pay
  • ISS updates its Proxy Voting Guidelines for 2018

In full:

Budget Developments

SAYE savings holiday period to be extended for those on maternity or parental leave

Tax advantaged SAYE options must be linked to a savings contract with an approved bank or building society under which option holders commit to save a specified amount each month for a period of 3 or 5 years (depending on the type of option granted). Under existing rules, option holders can pause their savings under the linked savings contract for up to six months without triggering a lapse of their option. The date from which they can exercise their SAYE option is then delayed by the length of the paused savings.

It was announced in the recent Budget that, for those on maternity/parental leave, the period during which savings can be paused will be increased to 12 months to coincide the maximum length of maternity/parental leave.

It is not currently clear whether this change will apply to existing savings contracts or only to those entered into on or after 6 April 2018 (when the new legislation will take effect). Similarly, it is also unclear whether the change will take effect automatically without the need for companies to amend their SAYE plan rules. We will update you once the answers to these questions become clear.

Corporate Governance

Investment Association revises its Principles of Remuneration for Executive Pay

The Investment Association has revised its “Principles of Remuneration”, making a number of changes to the version published in 2016. The Principles have been reviewed in light of the Government's proposed reform of corporate governance and the ongoing debate surrounding executive pay.

There are three key changes to the Principles:

  • Relocation benefits – as well as being fully disclosed in the Remuneration Report, relocation benefits should be disclosed at the time of appointment and be in place for a limited period only;
  • Annual bonus – there should be deferral in respect of any bonus opportunity over 100 per cent. of salary and bonus targets should be disclosed within twelve months of the payment; and
  • Long term incentive schemes – this section has been re-organised to give a clearer indication of members' attitudes to specific examples of schemes.

In addition, the Investment Association has highlighted the following aspects of the Principles that members have asked be re-emphasised to companies and which they should consider in respect of their 2018 AGMs:

  • Level of remuneration – reductions in variable remuneration opportunities and limiting overall pay are welcomed and members expect the progress made by predominantly larger companies in this area to be replicated across all companies who should show restraint in respect of any increase in variable remuneration and consider whether remuneration potential should be reduced. Companies must justify to investors the level of pay for executive directors and take into account the wider social context of executive pay.
  • Pay ratios – investors expect pay ratios to be voluntarily disclosed. These should encompass the ratio between CEO and the average employee, as well as the CEO and the executive team.
  • Pensions – executive directors' pension contribution rates should be at the same level as the general workforce.
  • Remuneration structures – following on from the amendments made to the Principles last year where the need for increased flexibility of remuneration structures was acknowledged, the Investment Association has highlighted that members' views on the use of restricted shares continue to evolve but that some members are wary that, in some cases, new remuneration structures are only being proposed when existing structures are not paying out.
  • Shareholder consultation – consultation should be meaningful and be regarded as a two-way process. This is an area where improvements can be made and, in some cases, lack of meaningful consultation has resulted in resolutions being withdrawn prior to the AGM.
  • Financial targets – as previously highlighted, there should be full disclosure of threshold, target and maximum performance targets, either at the time of payment of the award, or within 12 months where the need for a delay due to the commercially sensitive nature of the targets has been explicitly explained. Where a company used metrics which have been adjusted from reported numbers or headline KPIs, it should explain why this is appropriate and provide a breakdown of how the remuneration target has been adjusted.
  • Disclosure of personal and strategic performance targets – there should be a thorough explanation as to how personal or strategic targets have been met, not just a description of non-financial indicators. Reports will receive an amber top where there is insufficient information on non-financial targets. There will be particular scrutiny of bonus payments against non-financial metrics where the financial metrics do not warrant a payment.
  • Accountability of Remuneration Committee chair – whilst there are a range of approaches to voting against the re-election of directors amongst IA members, there is no doubt that Remuneration Committee chairs are coming under increased pressure. For example, some institutional investor voting policies provide that there will be a vote against the re-election if they vote against the remuneration resolution in two successive years.

A copy of the Principles can be found here

ISS updates its Proxy Voting Guidelines for 2018

ISS has published its proxy voting guidelines update for 2018 for the EMEA region (which includes the United Kingdom). The update highlights the areas of policy change for each jurisdiction which will apply in relation to meetings held after 1 February 2018.

Only a small number of changes have been made to the UK and Ireland guidelines. In respect of remuneration:

  • Audit and remuneration committee composition – clarification that ISS considers that audit and remuneration committees should be comprised only of independent directors (which brings the guidelines in line with the requirements of the Code); and
  • Threshold vesting levels for LTIPs - the previous guidelines stated that ISS prefers to see vesting levels at generally no more than 25% for threshold performance unless there are special reasons to support at higher percentage vesting at threshold (such as low positioning of salaries and long term incentive awards and relatively stretching targets at threshold). The 2018 guidance includes additional wording making it clear that vesting levels at as much as 25% may be considered inappropriate if LTIP grants represent large multiples of salary.

A copy of the Proxy Voting Guidelines can be found here

Key Contacts

Jonathan Fletcher Rogers

Jonathan Fletcher Rogers

Partner, Employee Incentives
London, UK

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