Pearson has followed in the footsteps of Aberdeen Asset Management, Compass, Imperial Tobacco and TUI Travel, and has become the fifth FTSE 100 company to release a statement to clarify certain aspects of the remuneration policy after the publication of its DRR.
The full details of Pearson’s addendum are below. In short, the follow-up looks to limit the Pearson remuneration committee when exercising discretion in certain areas, no doubt with a view to appeasing investors. Following the release of that document, it’s now a question of Pearson seeing whether this clarifying document is enough for shareholders to approve the policy. The D-day for that is 25 April, when the AGM takes place.
For others, quite how this investor approach to discretion sits with the GC100 guidance is a mystery. The GC100’s perspective on the general notion of discretion at the beginning of the recommendations suggested “it may be appropriate for the policy to provide for an “emergency” discretion for use only in other circumstances, which will be genuinely unforeseen and exceptional”. So companies have included that “emergency” discretion… only it seems it isn’t as appropriate as the guidance suggests, particularly when it comes to recruitment.
It appears investors expect committees to be clear that the “emergency” discretion doesn’t apply to recruitment (which is required to be expressly set out as a discrete part of the policy in any event) – so are we now in a position where the guidance (which, in its own words, “suggests “best practice” in the view of both investors and companies”) is already out of date? Whilst the GC100 group confirmed that it “intends to review and refresh the guidance from time to time to ensure it remains relevant and useful”, it’s doubtful it was envisaged this review would be needed before we even reach the end of the first reporting season! Of course, the whispers around town over the recent weeks suggest that ISS and the ABI will generally vote against “emergency” discretions that aren’t sufficiently caveated and limited.
Whilst three areas of the policy are included in the publication (see below for details), Pearson’s addendum also confirms that it had consulted with its major shareholders on the remuneration policy before publication of the DRR (dated 10 March 2014). However, Pearson’s remuneration committee has decided to take the opportunity to clarify (presumably as a preference to losing the vote on its remuneration policy) the basis on which certain elements of Pearson’s policy will apply (if approved) and to limit when and how remuneration arrangements which are outside the norm (including remuneration in excess of the normal limits set in the policy) might be applied.
- Exceptional circumstances discretion
Pearson’s policy stated that the committee had “attempted to avoid” including general discretions in the policy table. However, “exceptional or genuinely unforeseen circumstances may arise in the future and in those circumstances it may be in shareholders’ interests for Pearson to put in place remuneration arrangements that are outside the terms of the policy set out in this report”.
The release on 9 April confirms that discretion would only be used in very narrow circumstances, i.e., in “exceptional or genuinely unforeseen circumstances” which, according to the committee “would arise highly infrequently, if at all, in the lifetime of the policy”. In the event that discretion was used, the committee has confirmed it would “consult in advance with major shareholders“ and “would not proceed unless there was clear consensus in favour among those consulted”. In addition, the addendum confirms that the value of any remuneration arrangement put in in those circumstances would keep within the normal stated remuneration limits.
- LTIP awards
Pearson’s policy allowed long-term incentive plan awards (in the form of restricted shares that are not subject to performance conditions) to be made to executive directors, but “only in exceptional circumstances on recruitment”. The clarifying publication confirms that this particular discretion will only be used “where it is appropriate to compensate a new director on a ‘like-for-like’ basis for incentives foregone at a previous employer”. Other than in respect of LTIP awards (or where the terms of the new director’s existing employment and/or their personal circumstances is relevant), new executive hires would be engaged on the same terms (and awarded variable remuneration within the same normal limits) as the current executive directors outlined in the policy.
- Cap on increases
Finally, Pearson has also confirmed that the discretion to award base salary increases, allowances and benefits, and LTIP awards in excess of the normal maximum limits set out in the policy (to both current and new directors) will only be exercised in “exceptional circumstances other than in the case of increases in the cost of benefits that are outside Pearson’s control and changes in benefit providers”. Again, Pearson would consult with major shareholders before exercising this discretion, and any exercise would only take place if there was clear consensus in favour among those consulted. Interestingly, Pearson has now confirmed that, in these circumstances, the maximum value of the remuneration arrangement put in place following the exercise of this discretion will not exceed 25 percent over the normal limits already contained for each element in the policy (for example, base salary is capped at a 10% increase).
Pearson’s addendum, DRR and all other FTSE 100 companies’ DRR (and addenda) can be found in our single source document.