The National Association of Pension Funds (NAPF) has re-issued its updated Corporate Governance Policy and Voting Guidelines, including its view of how remuneration should be dealt with. Unsurprisingly, changes have been made to the last set of guidelines issued in November 2013. The changes reflect experience over the first year of accounts published under the new directors’ remuneration reporting regulations, as set out in the NAPF’s 2014 AGM Season Report (see our previous blog post for details). In particular, the ‘holistic conversations’ with shareholders referred to in the report are once again referred to in the NAPF’s guidance on relations with shareholders.
As often happens, there has been a good deal of moving text around and re-ordering of sections, without the substance having changed. So it could be difficult for companies to spot what they are expected to be doing differently, or in addition. As always, the devil is in the detail ….
There is still the emphasis on aligning executive pay policy with the pay policies and long term strategy of the business as a whole. However, a new concept is “read across”. Remuneration committees should “ensure that there is a strong read across from the company’s strategy to the drivers of executives’ remuneration” and “a lack of read across between [performance] metrics used and the company’s strategy” may result in a vote against its remuneration policy.
Shareholdings that executives are required to build up should now be “exposed to some tail risk for an appropriate length of time once they leave the company”, but there is no guidance given as to what appropriate might mean in this context. It appears that post-employment shareholding requirements for executives may become a new hot topic, the updated Corporate Governance Code also now states that “the remuneration committee should consider requiring directors to hold a minimum number of shares…for a period after leaving the company”. In addition, a shareholding requirement of not less than 2 x salary should be considered or a vote against the policy may be appropriate. Only around half of FTSE100 companies would have satisfied that requirement last season.
Other elements of a remuneration policy that may elicit a vote against, regardless of explanation, now include re-testing of performance conditions, “layering” of new share plans on top of existing ones and any guaranteed pensionable, discretionary or “one-off” annual bonuses or termination payments. New items in this category are an excessive amount of discretion for “exceptional circumstances” and vague or unlimited recruitment policies. The first of these tripped Pearson up. The latter was the cause of several companies having to issue updating/amending circulars before their AGMs over the last year (see our blog post on this topic) and BG Group recently having to significantly re-structure the offer to its new CEO.
The absence of provisions allowing the company to clawback sums paid or scale back unvested awards may also now warrant a vote against the remuneration policy. This highlights the recent attention clawback has received and, again, aligns with the new Corporate Governance requirement that schemes should include malus or clawback provisions.
There has been some re-allocation between the list of remuneration practices that may trigger a vote against the remuneration report without a “convincing” explanation and those that may trigger a vote against the remuneration policy in any event. With sufficient explanation in the remuneration report, companies may now be able to get shareholders to accept more frequent re-benchmarking, ex-gratia and other non-contractual payments, triggering of earlier or larger payments on a change of control and executive directors not having service contracts. Added to this category of practices since 2013 is an award of an unconditional signing-on bonus to compensate a new director for awards from a previous company that he has lost by moving.
To avoid a vote against the implementation report, companies must now take special care to explain sufficiently awards made in circumstances such as “serious reputational issues” or the use of discretion to allow higher pay-outs.
It’s clear that companies have been cut a certain amount of slack during the first year of getting to grips with the new reporting requirements on directors’ remuneration. It remains to be seen whether this indulgence will continue, but adhering to these amended guidelines should help companies avoid the bloody noses we saw at AGMs during the last season.