Revised guidelines for executive pay and incentivisation

Posted by Jennifer at 10:23 on 12 Dec 2017

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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.