Revised guidelines for executive pay and incentivisation
The Investment
Association (‘IA’) has recently published a revised version of its guidelines for
principles of remuneration for 2018 (here). Whilst these principles provide
guidance from institutional investors for listed companies, it is important for
all employers to abide by the spirit of them to ensure that their
incentivisation, and equity schemes, promote behaviour which is favourable to
the long-term objectives of their businesses.
Moralisation of tax
Executive pay, and the
role of equity incentives in driving growth and performance, remains a highly
contentious issue. This is something
that all companies must consider closely where they are intending to implement
a scheme particularly with the moral crusade against tax efficient planning widepsread in
the press, as demonstrated by the Paradise Papers leak.
What
do the IA suggest?
The IA strongly promotes the concept that remuneration should
promote ‘long-term value creation’.
On the matter of incentive schemes, performance conditions
should be carefully chosen with a post vesting holding of at least five
years. The guidance also states that value
vesting to participants in an incentive schemes should not be ‘significant’
when compared with annual base salaries of employees. Employers should really think about how much
value they hope to deliver to employees on a share incentive vesting and consider
whether it is appropriate for the long-term interests of the business. Interestingly, the IA state that full vesting
under an incentive scheme should reflect ‘exceptional performance’.
Consultation
The document stresses the need for companies to consult with
all the relevant stakeholders and that remuneration schemes and incentives should
have stretching targets that seek to tie employees into the business. This is clearly less relevant for small and
fast growing entrepreneurial businesses that are working towards an exit in the
short to medium term, but the IA guidelines do provide important points to bear
in mind in relation to your own company’s incentive scheme or what you need to
consider if you are proposing to implement one.
Tax-advantaged schemes remain popular
Tax advantaged schemes in the UK remain a popular and
government promoted way of delivering value to employees’ tax efficiently. For schemes such as the Enterprise Management
Incentive, where if certain conditions are met the employee can acquire shares
subject to a 10% tax rate on a sale, this is discretionary such that the
employer can devise stretching performance targets that drive key measures for
growth and sustainability.
RM2 can consult with you regarding what is appropriate for your business and how value can be delivered in an efficient way. Call 020 8949 5522 and ask to speak to one of our advisers, or consult our free fact sheet downloads for more information.