On November 11, 2015 The Investment Association (IA) published its Principles of Remuneration (the Principles) for 2015 and an accompanying introductory letter which outlines the key changes to the Principles since the 2014 edition.
The IA acknowledges in the letter that it did not consider it appropriate to make significant amendments to the Principles, however they have been updated to make it clear that it is now members’ expectation that long term incentives have a performance and holding period of at least five years in total.
The IA has also amended the discussion of commercially sensitive performance targets in Appendix 1. It has removed the wording stating that the use of the provision allowing these targets not to be disclosed is an exception, but makes it clear that use of the provision still needs to be justified. The updated Appendix states that shareholders expect that any company which considers their targets to be commercially sensitive must explain to shareholders the circumstances that justify the use of this approach, and indicate when targets will be disclosed in the future.
In its introductory letter, the IA also re-emphasises its guidance on issues of concern to shareholders, specifically:
Investors are concerned by the level and frequency of salary increases and have a clear expectation that basic salary increases should be limited to inflation or the increase being given to the general workforce. However, the IA notes that there is an upward trend in the number of salary increases above inflation, which are leading to a significant rise in the overall levels of remuneration packages. The IA will continue to scrutinise all salary increases, and believes that all salary increases should be justified with clear and explicit rationale, particularly for any increases in excess of inflation or the increases provided to the general workforce.
The retrospective disclosure of bonus targets is required so that shareholders can ensure that there is an appropriate link between pay and performance and so that the IA can justify supporting remuneration packages to its clients. The IA notes that there has been some improvement in retrospective disclosure of bonus targets in 2015, but that there are still a number of companies that provide no details on their bonus targets or consider them to be commercial sensitivity with insufficient justification.
The IA now expects that targets will either be disclosed retrospectively in full at the end of the year, or that there is a commitment to disclose such targets in full at a specified time in the future. If companies do not comply with this, the IA will ask IVIS to Red Top those companies. If relative achievement is disclosed, an Amber Top will be given.
This policy will take effect for companies with their year end on or after December 1, 2015.
The IA notes that there has been a lot of debate in 2015 on the length of service contracts and the majority of its members are still in favour of notice periods of up to 12 months. However, members also believe that new contracts should have equal notice periods for both the company and the director and that for new contracts, companies should introduce clauses to allow the withholding of pay in lieu of notice where there is any ongoing regulatory or internal disciplinary or misconduct investigation.
The IA is concerned with the large increase in pension amounts as well as complex pension arrangements for executive directors, which differ from arrangements that are in place for the rest of the employee population. The IA expects the pension arrangements of executive directors to be in line with those for the rest of the company.
Recruitment and leaving arrangements
Investors should continue to scrutinise recruitment arrangements and buyout awards. Any attempts to re-award or re-issue recruitment awards in the circumstances of a fall in company value are a particular concern for the IA, which believes that both the executive and the company take on risk during a recruitment situation and that it is inappropriate for the executive to be shielded from such risks.
The IA would like to reiterate that remuneration committees should take a firm approach when determining leaving arrangements and assessing whether an individual is a good or bad leaver and it expects full justification of the treatment of leavers, particularly where a leaver is deemed to be a good leaver.
(The Investment Association, Letter of Introduction to the Principles of Remuneration 2015, 11.11.15)
(The Investment Association, Principles of Remuneration 2015, 11.11.15)