New Investor Remuneration Guidelines
As we move into 2019, the investor institutions and proxy agencies have been busy, producing their revised remuneration guidelines. After a very active year in corporate governance there are, not surprisingly, a lot of changes.
Starting with Glass Lewis: this major voting advisory agency has just issued its 2019 Proxy Guidelines specifically for the UK . It is really worth reading, not least because the document provides the best summary we have seen of all the UK corporate governance regulations and other initiatives from 2018, put together in one place.
Their new guidelines focus particularly on the capability and evaluation of the board and its committees and the guidelines on remuneration itself are generally modest. One curious rule is that target bonuses should not exceed 50% of the bonus maximum. MM&K considers that that this is misguided. The right relationship between the maximum bonus and the on-target bonus is not a matter to be dictated by rules. It depends on the dynamics of the business, the extent to which out-performance is possible or likely and the sensitivity of forecasting. There are businesses where target and maximum should be the same and others where 50% is fully justifiable.
On 22 November, The Investment Association (IA) issued its new Principles of Remuneration, with a letter to Remuneration Committee Chairs from Andrew Ninian, its Director of Stewardship and Corporate Governance.
The new principles generally tighten up remuneration governance along the lines that the IA has been advocating since its Working Group reported in July 2016. The circumstances and requirements for describing Malus and Clawback have been clarified further; further guidelines around the use of restricted shares have been introduced; and tougher requirements for directors’ shareholding are stipulated, including the need for a post-retirement shareholding period of at least two years.
It is clear that the IA sees reduction in the levels of executive remuneration as a legitimate goal. For example, it mandates that, as soon as it is achievable within the limits of existing contracts, directors’ pension contributions should be aligned with those available to the workforce. This rule, of course, is there to meet the requirement of Provision 38 in the 2018 UK Corporate Governance Code which comes into force from 1 January. But it is also evident that IA members are coming under pressure from their clients to keep a ceiling on pay in “issuing companies” and curbing pensions is a gesture in this direction as well as appearing to be a move to reduce the gap between executive and general employee remuneration. The IA press release says that “investors will expect companies to pay pension contributions to Directors in line with the rate given to the majority of the rest of the workforce, rather than giving higher payments as a mechanism for increasing total remuneration.” In fact, the level of directors’ contribution has never been used as such a mechanism. It has its roots in history, when all directors were on final salary schemes and the level of contribution was dictated by much higher final salary directors earned. The DC contributions have been coming down over time as they could never be sustained at a level to match the old DB benefits. In any case, it is all rather academic as the HMRC Annual Allowance reduction of contributions to £10,000 a year means that most executives will receive cash in lieu and over time we expect that to become part of salary.
The IA is turning up the gas on corporate governance compliance. On 5 December it wrote to 32 companies in the FTSE All-Share which have appeared on the Public Register for both years. The letter expresses concern that these companies are on the Public Register for the exact same resolution in 2017 and 2018, suggesting that they did not respond sufficiently to investor views and in doing so are risking more shareholder dissent in the future. 15 of these are for Remuneration Report resolutions.
JD Ghosh will be writing a fuller article on the new IA guidelines for our December Newsletter. Click here to subscribe to our monthly e-newsletter.
The new IA guidelines are reflected in new house guidelines from Legal and General Investment Managers (LGIM), who updated their Principles on Executive Remuneration on 28 November.
The largest proxy agency, ISS, updated its 2019 Proxy Voting Guidelines for Europe, the Middle East and Africa on 19 November. Changes include the criteria for voting down a director and a requirement for remuneration committees to develop a formal policy for post employment shareholding. Like Glass Lewis, they say that the target bonus should typically be set at no more than 50% of the maximum bonus potential, with a demand for a robust explanation for any payments above target. The intention behind this is to stop excessive payments for mediocre performance. But we consider it is a blunt instrument.
ISS have sharpened up the guidelines on LTIP performance measurement and shareholding periods. They encourage performance periods longer than three years and a total holding period of five years. They suggest that on-target vesting for LTIPs should be less than 25% if the total grant is a large multiple of salary.
If a company’s share price has materially declined, the guidelines say, committees should consider reducing the size of LTIP grants. ISS are trying to avoid the situation where the number of shares covered by the grant is increased in order to preserve the face value of the grant. This can lead to excessive reward if the share price bounces back.
Finally they advise dilution limits in line with the IA guidelines.
The various guidelines can be downloaded by clicking on the links. For further information contact Damien Knight.