New Bridge Street update:

Executive remuneration areas of focus for the New Year

Our Insight Zone includes previous briefings on the above developments and access to our 2018 Reports on FTSE Directors' Remuneration.

Key changes arising from the new guidance include:

Principles-driven remuneration policies: companies will be required to demonstrate how their remuneration policies address six principles set out in Provision 40 of the new UK Corporate Governance Code (Code): clarity, simplicity, risk, predictability, proportionality and alignment to the culture of the company.

Post-employment shareholding guidelines: the general requirement for executives is 200% of salary and to be compliant with the new Code, Remuneration Committees will need a formal policy on post-employment shareholdings, covering both vested and unvested shares. Companies need to review share ownership requirements and plan documentation to establish appropriate arrangements for monitoring and enforcement.

Discretion: the use of discretion to moderate quantum is flagged by both regulators and investor bodies. Policies and plan rules should be reviewed to ensure that they allow discretion for Remuneration Committees to override formulaic outcomes. Whilst many annual bonus schemes already address this, LTI plan rules typically do not and will need updating.

Malus and clawback provisions: companies are encouraged to develop smarter clawback triggers and assess enforceability. The FRC Guidance on Board Effectiveness suggests that serious reputational damage and corporate failure might be included alongside the usual triggers of erroneous or misleading data, misstatement of accounts and individual misconduct. In addition, the Investment Association expect the triggers to be clearly disclosed and reinforce the need for companies to have appropriate documentation in place to ensure enforceability. We expect companies will require executives to sign forms of acceptance, confirming they understand the plan terms. It is also important to ensure that the remuneration policy, plan rules, any associated award documentation and employee contracts (where relevant) are consistent and do not contradict the malus and clawback provisions.

Additional reporting: the new regulations require reporting of CEO pay ratios and the impact of share price movements on LTI awards granted to executives. These are only compulsory for financial years beginning on or after 1 January 2019, but early adoption is encouraged.

Expanding the remit of the Remuneration Committee: Committees should, under the new Code, have direct responsibility for setting remuneration for all senior management, including the Company Secretary. It also reinforces the expectation that workforce remuneration and related policies, and the alignment of incentives and rewards with culture, should be taken into account when setting the policy for executive director remuneration and, further, that companies should engage with the workforce to explain how this has been taken into account.

The Wates Corporate Governance Principles for Large Private Companies

The Wates Corporate Governance Principles were published in December 2018. They cover private companies in the UK which satisfy either or both of the following:

• more than 2,000 employees;
  
• a turnover of more than £200 million and a balance sheet of more than £2 billion.

Like the new Code, they apply to corporate reporting for financial years starting on or after 1 January 2019.

The Principles recognise the variety of large private UK companies. Differing management and ownership structures mean that a ‘one-size-fits-all’ approach to corporate governance is not appropriate. Companies should therefore follow the Principles using an ‘apply and explain’ approach, applying each Principle within the context of the company’s specific circumstances and explaining in their own words how they have been addressed.

The Principles specify that boards should promote clear and transparent remuneration structures aligned to long-term sustainable performance, behaviours and achievement of company purpose, values and strategy. In setting director and senior manager remuneration, consideration should be given to remuneration throughout the organisation to reinforce a sense of shared purpose. Companies may wish to establish a remuneration committee to take responsibility for designing remuneration policies and structures.

As with the new Code, the importance of stakeholder engagement is emphasised throughout the Principles. Companies are encouraged to outline the methods of engagement used with the workforce and other stakeholders and demonstrate how boards have considered the issues raised.

Next steps

The changes discussed in this briefing create challenges for Remuneration Committees.

We can assist with every aspect of preparing for the changes, from supporting Remuneration Committees in deciding how to address the changes through to technical drafting and stakeholder communication.

If you require further information or would like to discuss issues raised in this briefing note please contact your usual representative or click here.

To aid Remuneration Committee planning for 2019, we have included a checklist of the key changes below.

Remuneration Committee planning checklist