“One size fits all” - rarely the right approach
Now it seems that the Investment Association (IA) have started to acknowledge this concern with the changes to the latest version of their Principles of Remuneration published in October 2016. The IA now consider that it is time to move away from their previous approach that a listed company should have one annual bonus plan and one long term incentive plan only regardless of the business efficacy (or lack of!) of this approach.
Other changes in the revised version published in October 2016 that caught the eye of RM2 were as follows:
Firstly, the amended principles state that executives should be expected to continue to hold their shares after termination of employment. Clearly this change is intended so that executives can be directly affected by the consequences of the decisions that they made when they were employed by their former employer (and the issues with Tesco’s accounts were clearly in the mind of the IA when considering changes to the Principles of Remuneration). Interestingly, the covering letter sent by the IA (to which the revised Principles of Remuneration were attached) to the FTSE 350 companies in fact refers to the encouragement of post-retirement shareholdings and indicates the potential direction of travel of the IA in this regard. However, we remember the opposition from relevant companies to the suggestion of post-retirement holdings of shares when the Financial Conduct Authority previously suggested the same notion towards the end of the last decade.
Secondly, on a “change of control” transaction institutional investors will expect outstanding awards of executives to be rolled over into equivalent awards with the acquiring company.
Finally, the revised principles have added an entirely new section on restricted share awards which make it clear that institutional investors regard restricted share awards as more likely to vest and that accordingly restricted share schemes should reduce the award sizes by 50% to allow for the greater likelihood of the awards vesting. The IA also opine on preferred vesting periods which should be at least 3 years.
If you have any comments or questions on the changes made or any other aspect of the IA Principles of Remuneration, please contact RM2 for further guidance or advice.