Executive remuneration is always a hot topic and it continues to be in the spotlight this year. The views of the UK Investment Association (IA) are influential, in particular the recommendations set out in its annual letter to remuneration committee chairs published in November 2017.
The IA represents investment managers and clients on investment issues, and through the Principles of Remuneration (the Principles), provides guidance on the manner in which remuneration should be determined and structured. While predominantly aimed at Official List companies, the IA noted in its most recent guidance that the Principles are also relevant to companies on other public markets, such as the ESM and the AIM. The Principles are not legally binding but they do have persuasive influence.
Another source of influence is the proxy voting guidelines of the US global asset manager BlackRock. As probably the largest asset management company in the world, announcements by BlackRock not only affect the companies in which BlackRock invests, but will also be taken into account by other institutional investors and their advisers.
A&L Goodbody view
The positions taken by the IA and Blackrock in respect of 2018 don’t throw up any surprises and reflect the prevailing approach from investors generally. Shareholders expect executive remuneration to be designed specifically to fit the business and strategy of a company and to align the economic interests of directors, managers and other employees with those of shareholders. What is appropriate for one business may not work for another. Here are our top 3 issues which companies and remuneration committees should focus on when designing equity incentive programmes for executives.
1. Appropriateness of chosen Remuneration structure
The IA encourages remuneration committees to adopt the remuneration structure which is most appropriate for the company and the implementation of its business strategy. This makes sound business sense – one size does not fit all. Interestingly from an Irish perspective, the IA has made it clear that in the right circumstances, its members will support restricted share plans. This is positive given the potential tax savings for awards of “clogged” shares for executives and directors who are subject to Irish income tax.
In the BlackRock proxy voting guidelines, a broad clawback provision is recommended which also covers executive behaviour resulting in financial loss to shareholders, reputational damage to the company or a criminal investigation. This recommendation makes good business sense and if lessons are to be learned from the Carillion failure, companies should take a specific look at their clawback polices. This is expected to be a hot topic of ongoing focus for shareholders particularly given the recent shareholder protests which resulted in a 50% clawback of awards for senior executives of UK housebuilder Persimmon. Also, the importance of careful legal drafting cannot be underestimated in light of the recent successful UK High Court challenge to the withholding of bonus awards by a former executive of Lloyds Banks.
3. Transparency on targets and structures
Shareholders expect full transparency on targets and structures so that the link is clear between remuneration and company performance. Where payments are made for achieving personal or strategic performance targets, the rationale should be explained. BlackRock has stated that it evaluates the equity compensation plans of companies based on a company’s executive pay and performance relative to peers and whether the plan plays a significant role in a pay for performance disconnect.