Quoted Companies: Remuneration Principles and the FSA Code an update
There are many codes, principles and guidance notes covering remuneration and share incentives. These provide the corporate governance framework for equity awards to employees by listed companies. Many of these guides have been updated in recent months and therefore we highlight below the salient matters. In the UK these include:
ABI Principles of Remuneration (November 2012)
- ‘the operation of share incentive schemes should not lead to dilution in excess of the limits acceptable to shareholders’;
- ‘performance measures and vesting conditions should be fully explained and clearly linked to the achievement of appropriately challenging financial performance which will enhance shareholder value’;
- ‘retesting of performance conditions is not acceptable’;
- ’the inclusion of clawback and malus provisions in scheme designs and executive contracts prevent executives receiving rewards that are undeserved’;
- ‘scheme rules should state there will be no automatic waiving of performance conditions...[on] a change of control and/or early termination of the participant’s employment’.
- Management should make a material long term investment in shares of the businesses they manage. This means 10 years whether remaining with the company or not.
- Pay should be aligned to long-term success and the desired corporate culture throughout the organisation.
- Pay schemes should be simple, understandable for both investors and executives, and ensure that rewards reflect long-term returns to shareholders.
- Remuneration committees should fully explain and justify how their decisions operate to deliver long-term business success.
UK Corporate Governance Code (September 2012)
- Options should not be offered at a discount except as permitted by the Listing Rules
- Grants under executive share options and other LTIPs should normally be phased rather than awarded in one block.
- Normally shares granted should not vest and options should not be exercisable in less than 3 years and directors should be encouraged to hold their shares for a further period after vesting or exercise, subject to the need to finance any costs of acquisition and associated tax liabilities.
- Options could be relevant to the determination of a non-executive director’s independence. Remuneration for non-executive directors should not include share options or other performance-related elements. If, exceptionally, options are granted, shareholder approval should be sought in advance and any shares acquired by exercise of the options should be held until at least one year after the non-executive director leaves the board.
FSA Remuneration Code (March 2013)
The FSA says that this code applies to around 2,700 firms, including all banks, building societies and investment firms obliged to comply with the Capital Adequacy Directive. The idea is to regulate pay practices so as to avoid encouraging inappropriate risk taking and to ensure that firms do not pay out more than they can afford.
Some of the main features of this Code include:
- Who it applies to – broadly speaking, the Code applies to senior management, risk takers and staff in control functions, collectively known as Code Staff.
- Deferral - at least 40% of a bonus must be deferred over a period of at least three years for all Code Staff. At least 60% must be deferred for the most senior management or when an individual’s bonus is more than £500,000.
- Proportion in shares – at least 50% of any bonus must be made in shares, share-linked instruments or other equivalent non-cash instruments of the firm. These shares should be subject to an appropriate retention period.
- Guarantees – firms must not offer guaranteed bonuses of more than one year. Guarantees may only be given in exceptional circumstances to new hires for the first year of service.
- Reporting - firms also need to disclose details of their remuneration policies at least annually.
- Proportionality – the FSA sought to apply the Code on a proportionate basis, taking account of an institution’s size, internal organisation and nature and complexity of their activities. There is guidance in “a four-tiered proportionality framework” that applies minimum expectations of compliance to each group. Guidance is given in letters to CEOs dependent on the ‘Tier’ (1-4).
If you wish to discuss your corporate governance obligations or take advice in relation to the compliance, administration or optimisation of your quoted company share incentives, including LTIPs, then please contact Fiona Bell on 020 8949 5522 or email Fiona.Bell@rm2.co.uk.