MM&K News

  • June 27, 2019

    Independent board evaluation: ICSA consultation

    The UK Corporate Governance Code requires, for listed companies, annual evaluation of the performance of the board. The chair should consider having a regular externally facilitated board evaluation.  In FTSE 350 companies this should happen at least every three years.

    The Government Department for Business, Energy and Industrial Strategy (BEIS) received responses on its Insolvency and Corporate Governance consultation paper suggesting that the standards of independent board evaluations vary considerably.  BEIS invited ICSA, the Governance Institute, to convene a group of representatives from investors, governance institutions and corporations to identify ways of improving the quality of board evaluations including the development of a code of practice.

    The group issued a report for consultation in May 2019 and consultation responses are required by Friday 5th July.

    The report begins with defining the purpose of board evaluation.  It then reviews company practice in the FTSE 350. Finally, it offers, for consultation, a draft code for external evaluation providers and a draft set of principles for companies employing them.  Following the consultation, the group will publish a report with recommendations and a revised draft of the code and principles.

    On receipt of the report, BEIS will decide whether and how to act.

    Purpose of board evaluation

    The report defines the purpose as a process of self-improvement by boards rather than providing an assessment of board effectiveness for quality assurance.  The group believes this is more realistic.  It will also demonstrate to shareholders and other stakeholders the board’s commitment to achieving high standards for themselves and the company.

    Analysis of current practice

    The report provides an analysis of current practice in the FTSE 350, using data from 2018.  In that year alone, 35% of FTSE100 and 32% of FTSE 250 companies had an externally facilitated board evaluation.  Over a three-year period nearly all companies are compliant with the UK Corporate Governance Code provision.  This figure is contrasted with only 37.5% of companies in Continental Europe over a three-year period.

    In 2018 FTSE 350 companies received evaluation services from 32 individuals or firms, a consolidation down from 51 in 2012.  Just four organisations undertook 65% of the work.

    There was limited data on the process of selection, although anecdotally it appeared to be getting more rigorous, with less reliance on mates of the chair.  Many boards had self-imposed limits on the number of times they would work with a reviewer (usually two or three times).

    In 2018 only 41% of FTSE 350 companies provided a good explanation of how the evaluation was carried out. This percentage should improve with the new provisions of the 2018 Corporate Governance Code. The same applies to a description of the outcomes and actions resulting from the evaluation.  In 2018 only 47% of companies provided this.

    Suggested actions

    The report emphasises the need for a share responsibility between the company board and the external evaluator.  The evaluator must be prepared to challenge the board’s perception of its own performance; the board in turn must be willing to allow the reviewer to do so.

    The three proposed measures from the report are:

    • A voluntary code of practice for providers of independent board evaluation, who would sign up to the code, in the same way that remuneration consultants (including MM&K) sign up to the Remuneration Consulting Code. An open question for the consultation is whether the code should be underpinned by an accreditation process or a process of oversight.

    • A set of voluntary principles for companies to apply in managing their board evaluation.

    • Guidance to companies on disclosure of the evaluation process and outcomes, to supplement the guidance issued by the FRC to support the 2018 Corporate Governance Code.

    The report includes a proposed draft for each measure and invites comments on the draft.  It leaves open whether application of the code of practice should be mandated.  It also raises the possibility of including shareholders in the process for appointing the evaluator.

    The code for reviewers

    There are three elements:

    • Competency and capacity – it provides a disclosure framework of activities and attributes against which code signatories have to demonstrate their experience and capability. The group invites view on how prescriptive this framework should be. It also wants advice on establishing processes for accreditation, oversight and monitoring that are rigorous but do no set excessive entry barriers to service provision.  Should the oversight body comprise mainly code signatories or be mainly independent?  What should its role be in:

    • Accreditation

    • Monitoring compliance

    • Operating a client complaints procedure

    • Reviewing the operating of the code and revising it where necessary?

    • Independence and integrity – the code is more prescriptive in this area – eg in dealing with conflicts of interest. The group is particularly interested in receiving advice on how to deal with conflicts of interest.

    • Client engagement – again the code is prescriptive eg in setting the terms of engagement.

    Voluntary principles for listed companies

    • Appointment of the evaluator will be the collective decision of the full board or the nomination committee – not the decision of a single board member.

    • The company will not appoint external reviewers with which it has other current commercial relationships or that have carried out more than two previous evaluations.

    • Terms of engagement will be agreed before the review commences, specifying the objectives and scope of the evaluation and the process to be followed.

    • The company will provide the reviewer with direct access to the board collectively and individually, and to all board and committee papers and to management and other stakeholders as necessary to meet the agreed objectives.

    • The company will provide the reviewer with an opportunity to present their findings to the full board.

    • The company will identify a contact with whom the reviewer can discuss in confidence any concerns about the management of the process (usually on of the independent board members).

    • In the annual report, the company will state whether it has followed these principles and whether the board reviewer is a signatory to the code. The report advises against making it mandatory for companies to employ a code signatory as the reviewer.

    • The reviewer will be asked to confirm the accuracy of the description of the findings and findings in the annual report.

    Draft disclosure guidance for listed companies

    The report also includes what is in effect an elaboration of the guidance provided with the 2018 Corporate Governance Code plus a description of the appointment and terms of reference of the independent reviewer.  It suggests:

    • How the evaluation has been conducted – objectives, scope, who involved, processes.

    • The evaluator, selection process, previous involvement, whether a signatory to the code, whether monitoring implementation of recommendations.

    • The outcomes and actions taken- the guidance recognises the commercial sensitivity of this, but encourages disclosure as far as possible to build trust.

    • How conclusions will affect board composition.

    For further information, contact Damien Knight

  • June 25, 2019

    Could negative bonuses be the future of variable pay for executives?

    Have a discussion about pay, and in particular executive pay, and invariably someone will raise the idea of “negative bonuses”.

    The concept is simple, if bonuses are meant to be a reward for delivering a performance that is above and beyond what is expected, then surely it is only ‘proper’ that an executive should have to pay something back to the company if results are shown to be below what was forecast.

    Tempting as it may be to apply such simple logic, the protection afforded to all employees (including directors) under UK employment law means that such a position would be impossible to introduce without the explicit agreement of the individual (and even then there would probably be cause for constructive dismissal given the relative bargaining powers of the parties).

    However, the core concept of “upside and downside” on bonuses is valid and there are at least two ways in which these might be successfully applied.

    Firstly, there should be nothing stopping a company from introducing this as part of a new package for a new appointment into a role.  From a practical perspective, this could be achieved through an adjustment to a mixture of salary levels and the levels at which bonuses are paid.  The commercial effect would be for someone to be paid less than a predecessor if performance was below agreed target levels.

    The second way in which bonuses could be adjusted downwards would be by using a fractional multiplier on the bonus itself. There are a number of ways this could be done. A method we have seen that is gaining popularity is to use performance management scores – where poor performance translates into a lowering of the bonus amount.

    For further information or to discuss any questions you may have, please do contact Stuart James.

    Please note that this concept of negative bonuses is different from the malus and clawback provisions discussed in a separate article in this newsletter. 

  • June 25, 2019

    Annual Returns for Share Schemes – deadline 6 July 2019

    For the tax year 2018/19, the deadline for filing the share schemes annual returns is 6 July 2019.  The filing obligation applies in relation to any new share schemes implemented as well as existing share schemes.

    HMRC do not send out any reminders. As there are automatic penalties for late-compliance, we recommend filing your online annual return without further delay.

    Please note that new share schemes will need to be registered with HMRC first before returns can be filed. The registration process may take a week or two and therefore it is imperative that the registration process is completed before the 6 July deadline.

    What needs to be done?

    Filings of the annual returns are done using HMRC’s Employment Related Securities (ERS) Online Services which can be accessed through the Employer’s PAYE online account. This can be carried out by the company directly or by any agent authorised to act on its behalf.

    Each employee share scheme requires a separate annual return. For group companies, only one company within the group needs to submit a return, irrespective of other participating group members.

    What needs to be reported?

    Each and every ‘reportable event’ that has occurred in the tax year 2018/19 must be notified to HMRC on the annual return. This includes:

    • the grant of a new option to an employee

    • the exercise of an option by an employee

    • the acquisition of shares (or interest in shares) by an employee

    • adjustment of options

    • the assignment or surrender of options by an employee for consideration

    • changes to the restrictions on shares and disqualifying events

    • any other events which give rise to a tax charge in relation to employment related securities

    If in any doubt as to whether to report a particular event, further advice should be sought.

    For tax-advantaged share schemes, namely, EMI, CSOP, SAYE and SIP schemes, each relevant event also needs to be reported to HMRC. However, each of these schemes has its own form of online annual return which should be filed separately.

    If there has not been any activity in the previous tax year, a ‘nil return’ should be submitted.

    For more information about filing of annual returns, click here.

    For further information contact Michael Landon.

  • June 25, 2019

    Update on the changes to the taxation of termination payments


    A series of reforms have been introduced to the taxation of termination payments from 6 April 2018 following technical consultation. Although the reforms started out as simplification measures, they now “clarify and tighten” the taxation of such payments. In other words, the legislative changes effectively enlarge the scope of taxation of termination payments.

    Position prior to 6 April 2018

    Termination payments (which were not taxed under any taxation provisions) made to employees as compensation for loss of office were free of income tax and national insurance contributions up to £30,000.

    The tax treatment of a PILON (payment in lieu of notice) depended on the contract of employment. If the employment contract provided for the employer to make a PILON, then the PILON was fully taxable. Conversely, if the employment contract made no provision for PILON, a PILON payment effectively constituted a payment of damages for breach of contract and could therefore be paid tax-free up to £30,000.

    Foreign Service Relief was available to employees who have spent periods working abroad and were non-UK tax resident for part of the period covered by the termination payment. The Foreign Service Relief is effective after taking into account the £30,000 exemption.

    Position from 6 April 2018

    All PILONS, whether or not there is a PILON clause in the contract of employment, are taxed as earnings.

    Termination payments are now split into two elements: (a) Post-Employment Notice Pay (“PENP”), and (b) the remaining balance. PENP represents the amount of basic pay the employee would have received had their employment been terminated with full and proper notice being served, to be determined by a statutory formula. This is subject to income tax and NICs.

    The remaining balance, to the extent not subject to tax as remuneration or payment for restrictive covenants, is considered for tax relief (as statutory redundancy payment or compensation for loss of office, etc.). The £30,000 exemption is still available to relieve against the payment of the remaining balance. Any payment in excess of the £30,000 (“Excess Remaining Balance”) is subject to income tax but not national insurance contributions (NIC) as was the case prior to
    6 April 2018.

    The exemption from tax for payments for injury and disability does not apply to injury to feelings, whether on or before termination of employment, except where the injury amounts to a psychiatric injury or other recognised medical condition.

    Foreign Service Relief has been removed for employees who are tax resident in the UK in the year in which their employment is terminated. However, the Foreign Service Relief continues to be available for employees who are non-UK resident in the year of termination.

    Changes from 6 April 2020

    Another significant proposed change to the taxation of termination payments is the alignment of income tax and NIC liabilities.

    The government had announced that the NIC legislation would be changed so that employer’s Class 1A NIC would apply to the Excess Remaining Balance (see above). This change was initially intended to take effect from 6 April 2019.

    The government recently announced that this major change will be delayed and will now take effect from 6 April 2020.

    For further information contact Michael Landon.

  • June 20, 2019

    MM&K partners with The London Stock Exchange, First Flight and Board Excellence in a seminar for AIM companies on directors’ pay, governance and board effectiveness

    On 20 June, MM&K Chief Executive, Paul Norris made a presentation at The London Stock Exchange (LSE) to an audience of AIM companies and advisers on designing fit-for-purpose remuneration policies. He was joined by Naomi Scott-Mackie a consultant in First Flight (non-executive search) and Kieran Moynihan (Managing Partner in Board Excellence) to reinforce the message that developing and maintaining a successful remuneration policy requires an independent, robust and well-functioning Board, operating within a sound governance framework.

    An effective Board and a sound governance framework are essential to the overall success of any business, but independent non-executive directors (NEDs) and good governance are particularly important in the context of executive remuneration. AIM companies are not “quoted companies” and so are not bound by the Companies Act strict remuneration disclosure requirements. As AIM companies are not listed on the main board of the LSE, the UK Corporate Governance Code does not bind them. However, AIM companies are required to adopt a corporate governance code (many adopt the QCA code) identify it on their web-site and explain how they have complied with its principles. Instances of non-compliance and the reasons for it, must also be identified.

    Corporate governance is catching up with AIM but with a lighter touch than for quoted companies listed on the main board. In an environment of lighter regulation (in which AIM operates) it becomes even more important to demonstrate to investors and other stakeholders  how the Board takes account of their interests and that the company is being run sustainably for the benefit of all its stakeholders.  This includes developing a remuneration policy that is demonstrably fit-for-purpose because it is competitive, supports the business strategy and is affordable (taking account of the economics of the business and stakeholder requirements).

    There are more than 1,400 AIM companies. Some of them are large corporations, which could (there are those who might say should) be listed on the main board. Many are early-stage, growing companies with large appetites for cash to fund their growth but few of the resources available to their larger peers. They all need good relations with their stakeholders. What amounts to fit-for-purpose remuneration for one AIM company will not necessarily be fit-for-purpose for another. Fortunately, flexibility exists to tailor a good result.

    The seminar was well-attended and there was a lively discussion after the three presentations concluded.  It is clear that this combination of complementary presentations struck a number of chords with the audience. MM&K is pleased to have participated in this event in partnership with the LSE, First Flight and Board Excellence and looks forward to repeating the experience. The seminar slides are available here.

    MM & K Limited advises extensively among AIM companies. For more information about executive remuneration, please contact: Paul Norris

  • June 20, 2019

    Do your malus and clawback provisions need updating?


    Malus and clawback provisions in incentive plans were originally introduced for financial institutions, mainly in response to the financial crash in 2008.  However, they have now become common for LTIPs and executive bonuses in all sectors.  They originally applied in very limited circumstances, such as misstatement of financial results or gross misconduct by the participant, but the range of events which trigger these provisions has been gradually expanding.

    Meaning of Malus and Clawback

    The term “malus” (except in the context of gardening) has become used broadly as an opposite to “bonus”.  It refers to the downward adjustment of incentive awards before they become payable – or before they vest or become exercisable in the case of LTIP awards or share options.

    In contrast, “clawback” means that participants are required to pay back all or some of an amount they have already received, for example the shares transferred on vesting of an LTIP award.

    Regulatory requirements

    Certain companies regulated by the FCA or PRA are required to include provisions which make variable remuneration awarded to material risk takers subject to clawback.

    The July 2018 version of the UK Corporate Governance Code, which applies to all companies with a premium listing, states (paragraph 37) that “Remuneration schemes …… should also include provisions that would enable the company to recover and/or withhold sums or share awards and specify the circumstances in which it would be appropriate to do so”.

    The November 2018 Investment Association (IA) Principles of Remuneration (section 4) require remuneration structures to “include provisions that in specific circumstances, allow the company to:

    • Forfeit all or part of a bonus or long-term incentive award before it has vested and been paid (‘performance adjustment’ or ‘malus’); and/or

    • Recover sums already paid (‘clawback’)”.

    Directors’ remuneration reports must set out the company’s policy on malus and clawback and, of course, the actual provisions need to comply with that policy.

    Typical circumstances

    The relevant regulations do not spell out the circumstances in which malus and clawback provisions should apply.  The most common triggers used by companies are:

    • material misstatement of the company’s results; and

    • gross misconduct by the participant.

    The IA now states that “remuneration committees should establish a more substantial list of specific circumstances in which the malus and clawback provisions could be used”.

    In practice, the additional reasons differ depending on the companies’ sectors and individual circumstances.  The ones which we see most often are:

    • material error in the information on which the size of awards or the extent of achievement of performance conditions was based;

    • material corporate failure;

    • material risk management failure;

    • serious reputational damage or material loss caused by the participant’s actions; and

    • material contravention by the participant of a company’s ethics and values.

    How clawback works

    Malus provisions are relatively easy to implement because no amount has been paid to the participants, and so the size or nature of the existing awards can be adjusted.

    In the case of clawback, however, amounts need to be recovered from participants.  For those who remain employed, this may be done by reducing other amounts due to them, for example by reducing future bonus payments or the size of unvested LTIP awards.  If the participant has been dismissed, it may be very difficult in practice to recover anything.  Moreover, the participant must give written consent to any deductions from wages.  For these reasons, it is advisable to require employees specifically to agree to the malus and clawback provisions in writing at the time when an award is first granted.

    Where an amount is clawed back, it may not be possible for a participant to recover tax from HMRC for the repayment – there is still uncertainty about the tax law in this area.  Many companies therefore only seek to recover the net of tax benefit received by the participants.

    Period of clawback

    UK financial institutions are required to make variable remuneration awarded to material risk takers subject to clawback for a minimum of seven years from the date of the award, or 10 years for certain senior managers.

    For other companies, the period varies considerably.  Some companies do not express a time limit, which may lead to a successful challenge based on proportionality.  Where a time limit is stated, clawback periods vary significantly from three years after the original grant date of an award up to five years after an award has vested or become exercisable.

    Many LTIPs now provide for a two-year period after the vesting date, during which the participant is obliged to continue to hold the shares acquired, at least the net number after deducting any exercise price or tax liability.  For many companies, it would be convenient for the potential clawback period to coincide with the holding period, as implementing clawback would be made relatively easier.  However, in others it may take many years for true financial performance to become certain, and in these cases the clawback period should be rather longer.


    Companies should ensure that malus and clawback policies, including principles behind the use of discretion, are clearly documented.  The IA Principles also state:

    “It is also very important that the documentation for the LTIP and bonus rules, the remuneration policy and employee contracts are all consistent. Any communication around the payment of bonuses or LTIPs should also be consistent with and not contradict the malus and clawback provisions. Remuneration committees should develop clear processes for assessing executives against either malus and clawback criteria or how they will exercise discretionary clawback. Demonstration of process and evidence of decision-making is very important in the event that clawback is contested.”

    We recommend that companies should review their current malus and clawback arrangements to ensure that they are fair and consistent and are clearly communicated to the participants potentially affected by them.

    For further information contact Michael Landon.

  • May 29, 2019

    Top Dogs and Fat Cats

    This new book from the Institute of Economic Affairs was published on 8 May 2019. It is a collection of essays on executive pay, providing fascinating insights into the nature of high pay and making a compelling contribution to one of today’s most contentious issues.

    The book is edited by Professor Len Shackleton of the University of Buckingham who has written the introduction which provides a critique of the top pay debate and summarises the individual contributions to the book.  He has also personally contributed an article on the consequences of “getting tough” on top pay. The contributors are a mixture of academics, practitioners and leaders of institutions.

    Below is a synopsis of each contributor’s essay.

    Why free marketeers should worry about executive pay

    Why free marketeers should worry about executive pay,  by Luke Hildyard, Director of the High Pay Centre. The HPC has a view that the greed of executives in large corporations has led to ever increasing pay differentials which are unjustifiable and damaging to society.

    This article begins the discussion by setting out the indictment against excessive CEO pay. Hildyard points out that executive remuneration in the UK has risen far faster than that of ordinary workers in recent decades, and claims that this has occurred without any corresponding improvement in company performance.  He dismisses the idea that international competition for rare talent justifies high CEO pay, pointing out that most firms promote their CEOs from within the company. His analysis suggests that long-established successful businesses (as opposed to entrepreneurial start-ups) are built on effective organisational systems rather than the abilities of the current incumbent CEO, who therefore has in many cases little influence over a company’s success. He draws attention, too, to elements of ‘crony capitalism’ that give many big businesses protected markets through their strong links to government.

    Hildyard suggests that the ultimate providers of capital – the beneficial owners of company shares – would like to see more modest levels of executive pay, but they are separated from the operation of corporations by a web of financial advisers, asset managers and pension funds. These intermediaries are themselves highly paid and see no problem in paying company executives generously.

    Listed companies are required to have remuneration committees which are independent of the company’s management structure, but members of these committees are themselves well-remunerated, are from similar backgrounds to company executives and often hold, or have held, executive posts at other companies. The committees are advised by consultants who (he claims) devise complex remuneration schemes to justify their existence, and act to bid up pay.

    In Hildyard’s view, this unsatisfactory situation is undermining the case for capitalism. Free-marketeers should be worried about this, and he supports reforms including worker representation on boards and remuneration committees, more detailed disclosure of pay structures and a requirement for institutional investors to consult ultimate beneficiaries on pay issues.


    Understanding the facts about top pay

    Understanding the facts about top pay,  by Damien Knight and Harry McCreddie, of MM&K.  This essay draws from the findings of a previous article we have published in our e-news.  The text of the article can be found here.


    The right and wrongs of CEO Pay

    The right and wrongs of CEO Pay,  by Alex Edmans, Professor of Finance at London Business School. Drawing on his own and others’ academic research, he demolishes a number of myths associated with the case against CEO pay. For example, he shows that, contrary to popular belief, CEOs who perform badly do suffer financially – though he points out that it is their wealth rather than their income which is affected, because much of their remuneration is in company shares and share options which lose value with poor performance. While Edmans believes strongly in the reform of company pay, he argues that disclosure of CEO/average pay ratios (a feature of the Government’s policy) can lead to inappropriate conclusions and have unintended consequences which may harm workers. For example, firms may outsource low-paid work to improve their showing. Edmans argues that reform efforts should focus on the structure of pay schemes, rather than the level of chief executive pay. Current pay schemes are complex, opaque and encourage short-termism. In particular, he argues that the use of LTIPs (Long-Term Incentive Plans) allows for ‘gaming and fudging’. He advocates instead that pay should simply be in cash and shares with a long holding period. If shares can at the same time be awarded to employees, they will gain in line with CEOs, which will help address concerns about fairness.


    What conclusions can we draw from international comparison of corporate governance and executive pay?

    What conclusions can we draw from international comparison of corporate governance and executive pay?  by Vicky Pryce, Chief Economic Adviser at the Centre for Economics and Business Research.  In her chapter, Vicky Pryce examines high executive pay in an international context. She points out that the phenomenon of rising pay for top executives is found in many countries, not just in the US and the UK. In continental Europe she highlights Germany. Large German companies are often held up as a good example of corporate governance, with wider stakeholder interests, including employees, represented on supervisory boards. Many British commentators argue that such representation will tend to inhibit excessive pay awards.

    However, as Pryce points out, CEOs of some leading German firms are paid extremely generously. She puts this down to the need to compete for international talent. Pryce also notes that, while the make-up of remuneration (the mix of salary, bonuses, shares and share options and so on) seems to differ in different parts of the world, high executive pay is also becoming a feature in Asia and Africa. She further points out that in some countries, for example China, recorded pay may understate the advantage executives enjoy from employment, as they also have access to a range of other benefits.

    Pryce notes that there is considerable opposition to excessive executive pay in many countries, although opinion polls suggest that antipathy is, perhaps oddly, rather less marked in those countries where executive pay is highest. Governments have been inhibited in their responses, she suggests, because they are concerned that precipitate action might produce little gain. International cooperation might encourage them to overcome their scruples, but so far this has been limited to some minor European Union initiatives.


    Two kinds of top pay

    Two kinds of top pay,  by Paul Omerod, an economist, author and entrepreneur, who is currently a visiting professor in computer science at UCL. In his chapter, Paul Ormerod tackles the differing reasons for the high pay received by entrepreneurs, top sports and entertainment stars (which is in his view acceptable) and by executives of large corporations (which isn’t). Entrepreneurs provide a product or service which did not previously exist, and are thus able to secure monopoly profits, at least until competitors produce something equivalent or superior. These high returns (whether in salaries or in personal wealth through share ownership) are a necessary stimulant to invention and innovation. Top athletes, artists and performers possess unusual talents which have been increasingly rewarded in recent decades as advances in communications technology have created worldwide markets for their services. But their highly visible achievements typically require exceptional personal effort and are not subject to great popular resentment. By contrast, Ormerod argues, executive pay has risen for reasons which have little to do with improved performance and exceptional individual effort. Drawing on network analysis, he argues that board opinions in favour of high pay have spread for reasons which defy traditional notions of rational, optimal behaviour. Networks of non-executive directors, management consultants and remuneration experts have in effect facilitated successful rent-seeking by CEOs.


    Top pay for women

    Top pay for women,  by Judy Z. Stephenson and Sophie Jarvis. Stephenson is the David Richards Junior Research Fellow at Wadham College Oxford; Jarvis is Head of Government Affairs at the Adam Smith Institute.

    Stephenson and Jarvis discuss the position of women in the top pay debate. While they recognise that women appear to be under-represented among top earners, they resist simplistic explanations in terms of discrimination and victimhood. They point out that the gender pay gap is widely misunderstood to involve women being paid less than men for the same work, when it is rather that men and women do different jobs, or work different hours, or have less continuous work experience. While this is partly the result of different choices and preferences, these are themselves gendered and reflect social, family and cultural expectations which are difficult to change. In an illuminating analysis, Stephenson and Jarvis see the labour market as essentially an ‘information market’ concerning job opportunities and workplace behaviours. Improving the flow of information to women is an essential element in improving employment trajectories and the possibility of higher pay. This may also be an analysis which has relevance to ethnic pay gaps: many ethnic groups are similarly under-represented in high-paying jobs. Stephenson and Jarvis welcome publication of gender pay gap data as a step towards improved information flows, while cautioning against ‘positive discrimination’ policies such as board quotas. The end goal should always be equality of opportunity rather than forced equality of outcome.


    Public service or public plunder

    Public service or public plunder,  by Alex Wild, a Director at Public First, a research and campaign consultancy, previously Research Director at the Tax Payers’ Alliance. Wild opens the discussion on the public sector, where the arguments for limiting high pay are apparently clearer. Wild points out that, particularly taking pensions and other benefits into account, lower-paid workers do markedly better in the public sector than in the private sector. But top earners in the public sector are paid substantially less than top earners in the private sector. However, few public sector jobs are directly comparable to those in the private sector. There are very limited opportunities in the public sector for independent judgement and actions, as politicians inevitably determine broad policy. There is also much less risk for people working in the public sector, as in most cases predetermined revenue comes from the government rather than the consumer. Senior civil servants, local authority chief executives and similar functionaries face many problems, but they do not operate in the same sort of competitive environment as that faced by company CEOs. It is therefore appropriate that they are paid less, though there should probably not be strict pay ratios or upper limits on public sector pay. Wild recognises, though, that the distinction between public and private is not as clear-cut as is often assumed. There are public sector leadership roles which do face competition, and private sector jobs which nevertheless have a close symbiotic relationship with the public sector. Here it may be appropriate to apply different criteria when determining pay.


    Are vice-chancellors paid too much?

    Are vice-chancellors paid too much?  by Rebecca Lowe, the Director of FREER, and liberal thinking think tank, and a Research Fellow at the Institute of Economic Affairs.  Lowe enlarges the public/private debate by looking at the specific problem of the pay of university vice chancellors, who straddle the two sectors. As so many people now have experience of university, and there is great concern over the levels of debt which graduates have accumulated, it is not surprising that the pay of vice-chancellors and other key staff has attracted considerable (perhaps disproportionate) attention, with the Office for Students now having a virtual power of veto over the pay of senior staff. Rebecca Lowe examines the issues in her chapter. Lowe points to the considerable range of institutions in the UK higher education sector, and suggests that they should not all be treated the same, whether in pay terms or anything else. She would prefer a formal segmentation of tertiary education as is found in some other countries. She notes that vice-chancellors are not particularly well paid in relation to their counterparts in the US, Canada or Australia, but points out that the roles in different countries may not be completely equivalent. Vice-chancellors are, however, paid reasonably well in relation to other staff in their institutions and Lowe argues against letting pay rip at the top end. While UK universities are less directly dependent on the public purse than they used to be, so long as significant government funding supports higher education it is reasonable that we should have special expectations about the way they are run, and how their staff are remunerated.


    Getting tough on top pay: what consequences

    Getting tough on top pay: what consequences, by Len Shackleton.  Professor Shackleton draws the themes together by considering the appropriate response to calls for action to rein in high pay in UK business.

    He looks at various proposals.  First Government policies to use “naming and shaming” as a soft pressure for companies to reduce pay – in particular the reporting of the pay ratio between CEO pay and employee pay quartiles (required of quoted companies with 250 or more employees by the 2018 disclosure regulations), and the publicising by the Investment Association of shareholder resolutions which obtain less than 80% of votes at the AGM.  The regulations also require companies to report the reasons behind increases in the ratio and explain how the ratio is justifiable.  Shackleton is not opposed to these measures, but feels that the majority shareholders will have little interest in them and they could have negative consequences such as outsourcing, delisting or going private, or changing the structure of CEO pay by reducing the proportion of variable pay or increasing benefits.

    Next he reviews proposals to put workers on the board.  He says that this has not been effective in restraining top pay in Germany and France and Labour Party plans to require one third of board positions to be reserved for employees are as much about introducing trade union influence to the board.  He thinks the measure will curb company growth.

    He turns to the idea of executive pay caps.  Already public sector salaries above £150,000 have to be signed off by the Cabinet Office.  The Labour Party is planning a cap on salaries in companies which benefit from Government contracts.  Shackleton questions the practicality of this and points out the negative impact for Government procurement.

    He believes that squeezing top pay will have a negative motivational effect on middle management, especially in organisations which employ scarce professional skills.  It could also have a serious effect on the UK’s ability to recruit top talent from aboard.  He points out that in 2017, 40% of FTSE-100 companies were headed by non-UK nationals.  The UK and France had less than 10% of top companies with non-national CEOs.

    He sees great danger in the general perception that top pay needs to be curbed and a risk that any control will creep into other aspects company management.  Governments need to be careful in how they react to populist calls for action, and giving governments the power to fix pay ratios or even pay caps brings dangers which are not sufficiently discussed by those demanding action.  He finds it disappointing to see so many of those ostensibly favouring free markets and limited government intervention joining the clamour against high pay.

  • May 29, 2019

    The effect on NEDs of proposed reforms to IR35

    Some non-executive directors (NEDs) also provide consulting services to the companies on whose boards they sit and to others. How will the proposed changes to IR35 affect the provision of those consulting services?

    HMRC published a consultation paper Off-payroll working rules from April 2020 on 5  March 2019. The consultation period closed on 28 May and the results will be taken into account when the Finance Bill is published in the summer. It seems likely, based on the consultation document, that existing public-sector legislation (Chapter 10, Part 2 of ITEPA 2003) will be the starting point for legislation governing the private-sector, but we will have to wait for the Finance Bill to find out for sure.

    Since 2017, public-sector companies have been responsible for determining whether those they engage to provide services are employees or independent contractors. Private-sector companies have been spared this responsibility, which hitherto has fallen on the service provider. From April 2020, however, medium-sized and large private-sector companies will also be responsible for determining whether an agreement to provide services amounts to a deemed employment. No new tax is being introduced; only a change to the person responsible for determining if a deemed employment exists and for accounting for income tax and NICs.

    Many individuals provide their services through a personal service company (PSC) which receives the fees paid for the services provided and from which the individual may receive a salary and possibly dividends. From 2020, private-sector companies will have to disregard the existence of a PSC and decide if the individual should be treated as an employee for tax and NIC purposes if engaged directly.

    From next April, if a private-sector company decides that its agreement for the provision of services amounts to a deemed employment, it (and not the PSC) will be required to deduct income tax and NICs from the fees it pays, for those services.  This change is likely to mean more work for in-house HR teams and their (internal and external) legal advisers and could involve a substantial increase in the fee-payer’s employer’s NICs liability. If the new legislation follows the public-sector regime, three key consequences will flow from the requirement to make an assessment as to whether, for tax and NIC purposes, an employment relationship exists between it and an individual contractor:

    • the company must inform its contracting party (agency or PSC) of the outcome of its assessment when the contract is made and may also have to inform the individual contractor of its decision;

    • if any questions are raised about the company’s assessment, it has 31 days in which to respond; and

    • the company must take reasonable care when making its determination as to whether a deemed employment exists.

    This will affect NEDs who are also contracted to provide consulting services in the same way as it affects other contractors. A directorship is separate from an engagement to provide consulting services. Fees for carrying out the office of director are subject to income tax and NICs, payable through the PAYE system.  However, whether consulting fees are subject to the same deductions depends on the nature and terms of the agreement and on whether a deemed employment exists. It would, therefore, seem sensible for any agreement to provide consulting services to remain separate from an agreement to carry out the office of director.

    For further information, contact Paul Norris.

  • May 29, 2019

    FRC publishes a guide on financial reporting for smaller listed and AIM companies

    The Financial Reporting Council (FRC) together with the Chartered Institute of Accountants have recently published a guide to help improve financial reporting within smaller listed and AIM quoted companies.

    It is specifically aimed as a guide for Audit Committee members and provides top tips for the members to consider and ask themselves (including questions which should be put to the external auditors and the management team) during each of the following stages:

    • Planning the audit

    • Production of interim and annual reports

    • Review of performance

    • Formulating an action plan for next year

    For the full report and more information click here.

  • May 29, 2019

    Proxy advisers: proposed US regulations are misguided

    This is a summary of an article written by Robin Ferracone, CEO of Farient Advisors, MM&K’s US partner in the Global Governance and Executive Compensation Group (GECN).

    Proxy advisers, such as Institutional Shareholder Services (ISS), review company disclosures and provide cost-effective, independent research and voting recommendations to institutional investors, using the investors’ own voting guidelines.  This enables resource-constrained investors to cover hundreds, if not thousands, of companies and to engage with each as necessary to protect their investments.

    Certain companies have criticised the increasing influence of proxy advisers, claiming that they are not fair, lack transparency, do not understand the company and are difficult to engage with.  In response, the US Congress has proposed legislation to require the advisers to register with the Securities and Exchange Commission (SEC) and to subject themselves to audits for conflicts of interest.

    However, does it make sense to regulate organisations that provide voting recommendations to shareholders cost effectively?  The power of proxy advisers may be overstated: research by Glass Lewis has found that their investor clients vote differently from their recommendations 37% of the time.

    Farient recently examined Say on Pay (SOP) votes cast for S&P 500 companies by 1,200 institutional investors, testing the hypothesis that smaller investors, with fewer resources, are more likely to follow ISS’s voting recommendations.  It found that:

    • The largest 200 investors voted in line with the recommendations of ISS 84% of the time, while the smallest 200 investors voted with the recommendations 89% of the time.

    • In contrast, looking at “AGAINST” recommendations only, larger investors are more likely to vote with ISS compared to smaller investors, 74% to 56% respectively.

    • The top 20 investors, ranked by assets under management, vote very differently relative to ISS recommendations. For example, BlackRock voted in support of SOP resolutions 97% of the time, following ISS recommendations 90% of the time; while BNY Mellon voted in support of these resolutions 56% of the time, following ISS recommendations only 64% of the time

    This evidence shows that institutional investors consult research by their proxy advisers to inform their voting decisions but in the end make up their own minds in casting their votes.

    Farient, like MM&K, encourages its client companies to engage with their investors and proxy advisers, to help them to understand what is happening.  Directors should tell the company’s story and provide a compelling narrative to ensure that proxy advisers do their jobs while the directors take the opportunity to explain that they are doing theirs.

    For further information, contact Mike Landon.