What has the Governance Code ever done for us?
If you run a private company, or your company isn’t listed on the main market, you are probably blissfully happy that you don’t have to “comply or explain” in accordance with the UK Corporate Governance Code. The latest version produced by the Financial Reporting Council (published in July 2018) runs to more than 50 pages of principles and guidance and pretty much tells you how your board should run your company.
Nonetheless, even if you don’t have to follow the Code, there is value in being aware of what it contains, because it sets out what is considered best practice in a number of areas. One of these is Remuneration (particularly of directors). If you’re concerned about how you should structure your share plans, take a look at some of the points below.
You don’t have to follow them, but if you do, you know that you’ll be heading in the right direction.
- Executive directors’ remuneration should be designed to promote the long-term sustainable success of the company. The 2018 version of the Code places greater emphasis on the relationship between companies, shareholders and stakeholders.
- Performance targets should be stretching, transparent and rigorously applied.
- There should be a formal and transparent procedure for developing remuneration policy and for fixing the remuneration of individual directors. The latest version of the Code promotes the importance of establishing a corporate culture that is aligned with the company purpose, business strategy, promotes integrity and values diversity.
- No director should be involved in deciding his or her own remuneration.
- Be sensitive to pay and employment conditions elsewhere in the company.
- Schemes should include provisions to allow the withholding or recovery of sums paid, including specifying the circumstances in which this applies.
- Consider what happens if people leave – be aware that poor performance should not be rewarded.
- Ensure an appropriate balance between fixed/performance related and immediate/deferred remuneration.
- Consider a minimum performance period of 3 years before awards vest.
- Phase option grants/share awards (rather than making one award in a block at the outset).
There’s not really very much here that is controversial. Bear these points in mind when you’re thinking about your share plan, and you won’t go far wrong. If you wish to discuss any of these points in further detail give us a call on 0208 949 5522.