Investment Association's principles of remuneration

Posted by RM2 at 08:47 on 15 Jan 2019

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On 28th November 2018, the Investment Association (“IA”) published a revised version of its principles of remuneration.

The main changes are:

Firstly, a recommendation of a minimum two-year period during which executives are required to hold their shares post any termination of their employment that may have occurred.

There will be a minimum level of shares that an executive will be required to retain after their termination set at a level equal to the lower of the company’s shareholding requirement in force immediately before leaving or the executive’s actual shareholding on leaving.

It is likely that to comply with this recommendation it might be necessary for a company to use an employee benefit trust (“EBT”) or a nominee to hold the former executive’s shares.

Malus and Clawback

This is the main and most important change. The amended IA principles note that previously the usual trigger events for malus and clawback (namely gross misconduct and misstatement of results) were extremely rarely triggered. There has also been considerable difficulty linking trigger events to “teflonesque” individual directors.

The IA now wish to see a “more substantial” list of specific circumstances in which malus and clawback can apply. In addition, the IA recommends that companies require executives to sign a form of acceptance at the time of a share award, which sets out the specific malus and clawback rules that will apply in their case.

As a matter of good corporate governance, the IA expect that remuneration committees have appropriate processes for assessing whether a trigger event has occurred and when they will exercise a discretion to apply malus or clawback. Naturally the process and decision must be clearly documented.

Restricted share plans

Finally, the IA have updated their guidance on restricted share plans. These plans are only really found in the listed companies’ arena; however for completeness it is worth mentioning that this type of plan can still be appropriate provided that they have some sort of performance link to vesting. Vesting periods for restricted share awards should be at least 5 years. The revised guidance notes that investors should be suspicious of the implementation of a new restricted share plan where the previous remuneration strategies were delivering appropriate outcomes or where the new restricted plan is proposed only because current arrangements are not “paying out”.

Final thought

While it is easy for private companies to remain slightly smug that these IA principles only currently apply to their listed brethren, the IA principles can at times bear similarity to the development of a Formula 1 car and there can be a trickle-down effect. Essentially what is required of listed companies first, can in some cases trickle down and apply to certain (if not all) private companies.

If you want to discuss how these changes affect your share schemes please give us a call on 0208 949 5522 or email enquiries@rm2.co.uk.