Articles, Thought Pieces
Voting on director remuneration reports & policy
Since 2014, a quoted company’s directors’ remuneration policy must be approved by shareholders’ resolution (i.e. a binding vote) at least every three years [s439A CA2006]. The actual remuneration continues to be subject to an annual advisory vote; that is, the vote outcome on this latter resolution is non-binding on the company.
However, if this advisory vote is lost, the remuneration policy must be put to a renewed binding vote at the next Annual General Meeting (AGM).
No directors’ or shadow directors’ remuneration or loss of office payment may be made unless it is in accordance with that approved policy or has been specifically approved by a shareholders’ resolution [ss226B, 226C CA2006].
Payments (purportedly) made in contravention of these provisions are void; the recipient holds the money as trustee for the company; and the directors who authorised the payment are treated as (each) indemnifying the company for any loss [s226E CA2006].
The remuneration policy must first be put to a shareholders’ vote at the first AGM at which a set of reports and financial statements, for a year ending on or after 30 September 2013, are laid before shareholders [SI 2013/2227, s82 Enterprise and Regulatory Reform Act 2013].
Basic Issues for Consideration
The following table sets out the basic remuneration questions which should be considered, these are expanded on below in relation to both remuneration report and policy votes. This is the standard table that would be included in a Boudicca Risk Assessment.
|Best Practice Guideline||Source|
|In normal circumstances, shares granted or other forms of deferred remuneration should not vest or be paid, and options should not be exercisable, in less than three years.||UK Corporate Governance Code, Schedule A|
|Vesting of incentive awards is conditional on the achievement of performance hurdles.||ISS 2016 UK and Ireland Guidelines|
|Threshold vesting amounts, reflecting expected performance, should not be significant by comparison with annual base salary.||Investment Association Principles of Remuneration 2015|
|Remuneration for non-executive directors should not include share options or other performance-related elements.||UK Corporate Governance Code, D.1.3.|
|Awards under all share schemes must not exceed 10% of issued share capital (adjusted for share issuance and cancellation) in any rolling 10 year period. Executive (discretionary) schemes should not exceed 5% of issued share capital (adjusted for share issuance and cancellation) in any rolling 10 year period.||Investment Association Principles of Remuneration 2015|
Annual Report on Remuneration
For all financial years, the directors’ remuneration report includes details of the actual remuneration of the directors.
These disclosure requirements are located in sections 420 to 421 of the Companies Act 2006 (‘CA’) and of Schedule 8 of SI 2008/410 Large and Medium-sized Companies and Groups (Accounts and Directors’ Report) Regulation 2008.
Companies listed on the London Alternative Investment Market (AIM) do not need to meet the definition of a quoted company and therefore are not required to prepare a directors’ remuneration report. An AIM company may voluntarily produce a directors’ remuneration report as if it was subject to the Companies Act requirement. They may also ask their auditor to report on the remuneration report as would be required for a quoted company.
Quoted companies are also subject to the somewhat limited disclosure requirements of paragraph 1 of Schedule 5 of SI 2008/410 (Information about Benefits of Directors). If such a company is on the UK Listing Authority’s Official List it will also be subject to the disclosure requirements of the Listing Rules. These requirements have been substantially reduced for periods ending on or after 30 September 2013, given the implementation of the extended remuneration disclosure requirements following this period.
The following are considerations that Proxy Advisers and institutional investors will take into account when determining vote recommendations / decisions at AGMs.
Remuneration Report: Key voting issues will be:
- Any increases, either to fixed or variable remuneration, for the year under review or the upcoming year should be well-explained and not excessive;
- Double figure increases will attract particular attention. Remember, increases in salary would tend to be multiplied throughout the remuneration package as incentive arrangements are often based on a multiple of salary;
- The bonus received and/or the proportion of the long-term incentive plans (LTIPs) which vested should be a fair reflection of the performance achieved;
- Pay attention to the direction of travel of the performance measure. If it is declining, advisers and institutional investors’ governance teams will expect bonus payments to reflect this;
- If performance is negative, it will be difficult to justify the payment of a bonus;
- Any amendments to the performance measure during the period (‘in-flight’) will be seen as a ‘Red Flag’ and are likely to cause negative votes;
- Ideally the way in which the unit of measure is calculated should be fixed at the beginning of the performance cycle; e.g. if earnings per share (EPS) is used as a measure, the EPS calculation should be disclosed. The impact of exceptional items and share buy-backs can raise questions;
- Where possible targets attached to short and long term incentive arrangements should be subject to different performance condition. If not, the company may be accused of rewarding its directors twice for achieving the same target;
- Performance targets should be measured over an appropriate period and should be sufficiently stretching;
- Ideally the performance conditions should reflect in part the KPIs which are included in the narrative section of the Annual Report, either the CEO’s or Financial Directors review;
- Performance periods should be at least three years. Some investors may require specific sectors, e.g. oil and gas to have longer periods (six years) to reflect the actual business cycle;
- Many investors now expect additional holding periods following vesting, resulting in overall vesting/holding periods for long-term incentive awards of five years;
- Targets for the bonus or the LTIP should be disclosed in an appropriate level of detail;
- Most will consider retrospective disclosure of bonus pay-outs against performance to be acceptable;
- Payments of discretionary or transaction related bonuses are considered ‘Red Flags’ and are likely to cause negative votes;
- Focus on joiners and leavers. Proxy Advisers are likely to focus attention on directors who joined or left during the year. This will have been flagged in the Chairman’s statement and the remuneration report;
- Special arrangements for new joiners should be reasonable, in line with awards lost upon leaving the prior job, and should link the director’s pay with company performance immediately (in the form of company shares);
- Where possible, joining awards should be subject to the attainment of performance conditions and vest over a number of years. Governance teams will view such awards as undermining the retention aspects of remuneration packages in general;
- Exit payments are often seen as rewards for failure and will again be considered ‘Red Flags’;
- By definition, a joiner would tend to come onto the board part way through a year, therefore all payments should be prorated. If any discretion is used this should be disclosed;
- Where internal appointments are made, Proxy Advisers will not expect a joining fee to be paid. Best practice would be to make reference to changes to the remuneration package before and after the promotion (either to the board or a change in position on the board);
- The remuneration committee should exercise discretion appropriately. Where it is applied, it should be fully explained. If none has been used during the year, include a statement to this effect; and
- Any other issues in the report which would be of concern to shareholders.
Note: PIRC applies a scoring matrix, where the rate of change in total shareholder return (TSR) will be compared to the rate of change in the CEO’s total remuneration (in this case including the value of any vested award). If the rate of change in TSR (rebased to 100 over a five-year period) is less than that of the rate of change of the CEO’s remuneration, the weighting will produce an AGAINST vote.
To facilitate the binding voting on policy, the directors’ remuneration report includes a statement of the policy in those financial years’ reports that will be laid at the AGM at which the policy vote will take place; in other years it must be available for public inspection, but need not be included in the directors’ remuneration report.
In the latter case, the directors’ remuneration report must disclose where the policy can be found (e.g., on the company’s website) and must give the date of the last general meeting at which the policy was approved [Schedule 8, para 1(3)].
The remuneration policy part of the report must be set out as a separate section of the report. It constitutes the policy of the company and is required to be put to a shareholders’ vote at least every three years [s439A CA2006]. The information is not auditable.
Where the policy allows the directors to use discretion, that fact needs to be stated as well as the extent of that discretion [Schedule 8, para 24(4)]. The GC100 and Investor Group discusses flexibility, discretion and judgement and particularly provides some insight into how much discretion investors would expect to be included in the drafting of the policy. Discretion which leaves the remuneration committee with unrestricted powers to increase and/or change the shareholder approved remuneration policy is generally not accepted by investors.
Remuneration Policy: Key voting issues will be:
- Overall remuneration policy and specific scheme structures should not be overly complex;
- The company’s approach to fixed remuneration should be appropriate;
- The award levels for the different components of variable pay should be capped;
- Speciality finance companies will face particular problems as these tend to operate a bonus pool position. The amount is capped in that the size of the pool is capped. However, governance teams prefer to see the cap set as a percentage of base salary, and the quantum is reasonable when compared to peers;
- Any increases to the maximum award levels for the LTIP and bonus plan should be adequately explained – the quality of explanation of the change will be key;
- Performance conditions for all elements of variable pay should be clearly aligned with the company’s strategic objectives, and vesting levels are in line with UK good practice;
- Look back at the key performance indicators (KPIs) in the strategic review, are these repeated in the remuneration report;
- Change of control, good leaver and malus/clawback provisions should be in line with standard practice in the UK market;
- Cases where a remuneration committee has insisted that awards lapse and no compensation is due should be highlighted. This is evidence of integrity of action by the committee. Proxy Advisers are likely to focus on large compensation payments. Remember, by law, the company needs to only compensate a director for loss, if it caused it. If the director retired, then he caused the loss and there should be no need to compensate;
- The shareholding requirement for executive directors should be appropriate;
- Most investors will expect a minimum of 200% of base salary to be retained in shares. You will also need to consider how this is achieved. The use of previously vested awards is often frowned upon as these are considered free shares;
- Service contracts should contain notice periods of no more than twelve months’ duration and potential termination payments are linked to fixed pay with no contractual entitlements to unearned bonus on termination;
- Non-executive director pay should not include any performance-related remuneration beyond their standard fees;
- The treatment of new joiners should be appropriate, with particular attention paid to the use of buy-out awards, and that the potential for any additional awards is capped;
- The remuneration committee should only seeks to reserve a degree of discretion in line with standard UK practice; and
- Any other issues in the policy which would be of concern to shareholders.
Note: PIRC applies a similar comparative analysis for the remuneration policy. In this case, the CEO’s remuneration is based on the award level not the reward (vested) level for incentive payments.
Disclaimer: All reasonable care has been taken to ensure that the information in the report is accurate and not misleading at the time of publication. No independent verification has been undertaken of this information. Please be aware that the corporate governance environment is fluid and those policies and allegiances are subject to change. In no event shall Boudicca Proxy Ltd be liable for any direct, indirect, incidental, economic or consequential damage rising out of the use of the documents and/or the information within this publication.