- July 30, 2019
Latest statistics for all-employee share plans
ProShare issued its Save-As-You-Earn (SAYE) & Share Incentive Plan (SIP) Report in respect of the 2018 calendar year on 25 June 2019. HMRC published its latest statistics on tax-advantaged share plans for the tax year 2017-18 on 27 June 2019.
This article extracts details from the two data sources about current practice for these two tax-advantaged all-employee share plans. Figures differ between them due to differences in the time periods and samples of companies.
Number of companies operating SAYE
Both sources give three sets of figures about the number of SAYE schemes in place. But both show that about 300 companies actually granted SAYE options during the latest year. (This represents a substantial fall from the more than 1,000 SAYE schemes operated throughout the 1990s.)
Terms of SAYE offers (ProShare)
Although SAYE legislation allows a qualifying period of up to five years, most companies either have no eligibility period at all or only require up to three months of service. They apparently take the view that a commitment to save for three or five years is more relevant than past service.
During the year, 82% of companies offered an option exercise price at the maximum permitted 20% discount.
3-year versus 5-year options
64% of companies offered 3-year options only, with the remainder offering a choice of 3-year and 5-year options. In practice, 86% of options granted during the year were for three years.
Employee participation in SAYE (grants during the year)
The higher number of grants from the ProShare figures suggests that some of these options may not have been tax-advantaged or were granted to overseas employees.
We estimated monthly savings from the HMRC data assuming the same division between 3-year and 5-year options as reported by ProShare.
Number of companies operating SIPs
The figures show that about 80% of the companies awarded Partnership Shares and about two-thirds of these also awarded Matching Shares. Just over a quarter of the SIPs awarded Free Shares.
HMRC figures show that more companies awarded Dividend Shares than other types of award because entitlement to Dividend Shares continued for past awards even if companies made no new offers in the current year.
Terms of SIP offers (ProShare)
The SIP legislation allows an eligibility period of up to 18 months before the award date for Free Shares. This enables companies to make awards only to employees who were employed for a complete financial year. Despite this, more than 60% of companies either have no eligibility period at all or set it at less than 12 months. This suggests that most companies use Free Shares as a future retention tool, as opposed to a profit share which rewards past performance.
ProShare does not report eligibility periods for Partnership Shares. In our experience, as for SAYE, there is usually either no eligibility period or a maximum of three months.
The SIP legislation allows companies to match each Partnership Share (bought with employee contributions) with up to two Matching Shares. The ProShare report shows the following range of market practice.
70% of SIPs with Partnership Shares either offer no Matching Shares at all or a matching ratio of less than 1 for 1.
Employee participation in SIPs
In the above table, the HMRC figures for annual awards of Partnership and Matching Shares have been divided by 10 on the assumption that most (but not all) awards of these types of shares are made monthly. However, the ProShare participation levels suggest that a higher proportion of Partnership Shares are now acquired only once a year and that the HMRC figures should only be divided by, say, 5. (An alternative explanation is that the ProShare figures include some non tax-advantaged awards and those made to overseas employees.)
ProShare reports that 26.5% of companies offering Partnership Shares allow lump sum contributions and 12% operate an accumulation period, instead of monthly purchases. This may suggest a trend towards awards being made less frequently than once a month.
The HMRC figures in £ above for Partnership and Matching Shares represent the average value of shares awarded on each award date (whatever the frequency). Nevertheless, the average Partnership Share award value of £100 is close to ProShare’s average monthly contribution of £99.
For further information please contact Mike Landon.
- July 29, 2019
Government response to BEIS Select Committee
The Business, Energy and Industrial Strategy Committee of the House of Commons (the BEIS Select Committee) published on 26 March a further report on Executive Rewards. It contained 16 recommendations to Government.
The Government’s response to the report (HC2306) was published on 13 June
The Select Committee comprises six Labour MPs (including the Committee Chair, Rachel Reeves) five Tory MPS and one SNP MP. Not surprisingly, the Committee’s conclusions and recommendations on executive pay and corporate governance reflect the political balance of its membership. It starts with an acceptance that executive pay is disproportionate and not linked to performance and that differentials are growing; it looks for measures to control and reduce executive pay, particularly using new powers to be given to the new Regulator due to replace the FRC.
The Government’s response is measured and, whilst it “welcomes” the Committee input, it accepts practically none of the recommendations. Its position is that a lot of corporate governance changes have been introduced in the past 18 months: a revised UK Code, a new set of corporate governance disclosures including the pay ratio publications; most recently changes to the Directors’ Reporting Regulations to comply with the requirements of the Shareholder Rights Directive II. In parallel the IA “name and shame” register has been introduced as have the Wates principles for private companies. It wishes to allow these measures to bed down and be appraised before introducing any new measures. It also takes the view that the requirements of companies and shareholders vary widely and changes are principally a matter for shareholders, not government prescription.
MM&K believes this is a sensible response.
Particular recommendations and responses include the following:
Further recommendations for change (e.g. on pension contribution alignment and revisions to the Stewardship Code) appear to be already under way.
For further information, contact Damien Knight.
- July 29, 2019
2019 Global Trends in Corporate Governance– progress update
GECN is a group of independent firms, specialising in advising corporate clients on executive compensation and good governance. GECN member firms have offices in London, Geneva, Zurich, Kiev, Singapore, Melbourne, Sydney, Los Angeles and New York. MM&K has been the UK member firm since 2015
For a few years now, GECN has conducted annual research on trends in corporate governance and published reports on its findings.
Our reports address such topics as executive compensation, board structure and composition, and shareholder rights and give a truly global outlook on the trends in corporate governance. The 2018 Report covered 19 countries across six continents and we are aiming just as high this year.
The 2019 Report will focus on investor perspectives about executive compensation and corporate governance, and on where investors will be directing their attention in 2019 and beyond. GECN member firms have already completed 25 in-depth interviews with leading institutional investors, proxy advisers and investment funds to identify current investor concerns and trends for the future.
We are preparing the first draft of the 2019 Report and aim to publish the 2019 Global Trends in Corporate Governance Report by the end of August or early September.
To request a copy of previous Global Trends in Corporate Governance Reports or for further information please contact Margarita Skripina.
- July 25, 2019
Green Finance Strategy will increase companies’ disclosure requirements
On 2 July 2019, the UK Government published its Green Finance Strategy: Transforming Finance for a Greener Future, which is intended to ensure that “our financial system is robust and agile enough to respond to the profound challenges that climate change and the transition to a clean and resilient economy bring with them”. The paper includes proposals which will increase the requirements for listed companies and pension funds to disclose climate-related risks.
Climate change presents companies with far-reaching financial risks from physical factors, such as extreme weather events, and transition risks that arise from the adjustment to a low-carbon economy. There are also great opportunities: the expected transition is estimated to require around $1 trillion of investments a year for the foreseeable future.
There are already requirements for companies to disclose these risks and opportunities:
• The UK Corporate Governance Code 2018 requires that a company’s annual report should include a description of its principal risks, what procedures are in place to identify emerging risks, and an explanation of how these are being managed or mitigated.
• The FRC’s Guidance on the Strategic Report states “an entity should consider the risks and opportunities arising from factors such as climate change and the environment, and where material, discuss in its Strategic Report the effect of these trends on the entity’s future business model and strategy”.
However, the Task Force on Climate-related Financial Disclosures (TCFD), in its Final Report (June 2017), found that there were inconsistencies in companies’ disclosure practices and warned that inadequate information about risks can lead to a mispricing of assets and misallocation of capital. The report recommended a new framework for disclosing:
• The organisation’s governance around climate-related risks and opportunities.
• The actual and potential impacts of climate-related risks and opportunities on the organization’s businesses, strategy, and financial planning.
• The processes used by the organization to identify, assess, and manage climate-related risks.
• The metrics and targets used to assess and manage relevant climate-related risks and opportunities.
Action against climate change has become more urgent following the publication in October 2018 by the Intergovernmental Panel on Climate Change (IPCC) of its Special Report: Global Warming of 1.5 ºC, which highlighted the potential catastrophic impacts of global warming if it exceeds 1.5°C above pre-industrial levels. Following considerable political pressure, the UK Government recently legislated to reduce carbon emissions to net zero by 2050.
In the Green Finance Strategy, the Government set out its expectation for all listed companies and large asset owners to disclose in line with the TCFD recommendations by 2022. It has established a joint taskforce with UK regulators to “examine the most effective way to approach disclosure, including the appropriateness of mandatory reporting”.
In addition, from October 2019, occupational pension schemes will be required to publish their policy on financially material considerations, including those arising from climate change.
Companies will therefore need to demonstrate not only that they have a good understanding of how the risks and opportunities arising from climate change will affect them but also that they have integrated their response to these in their business strategies and governance procedures. The Government has promised further guidance on these issues. In the meantime, some companies will find it helpful to participate in initiatives such as CDP (formerly the Carbon Disclosure Project), the Transition Pathway Initiative (TPI) and Science-Based Targets.
Once companies have fully integrated their plans to deal with climate change and the transition to a low carbon economy within their business strategies, they must ensure that their performance targets for executive incentive arrangements are aligned with them. The Investment Association’s Principles of Remuneration state that “Remuneration committees may consider including non-financial performance criteria in variable remuneration, for example relating to environmental, social and governance (ESG) objectives, or to particular operational or strategic objectives. ESG measures should be material to the business and quantifiable”.
The Shell Sustainability Report 2018 demonstrates how Royal Dutch Shell has already included climate change targets as part of its executive incentives.
For further information contact Michael Landon.
- July 22, 2019
Competition for Talent in the UK Private Equity Industry is as keen as ever
There is no doubt that the Private Equity and Venture Capital landscape is becoming even more crowded, with new funds successfully being raised and an almost unbelievable level of “dry powder” available to be invested worldwide. Apparently, the global figure has recently reached $2.5trn.
Geographically, the majority of dry powder is still targeting North America, although that proportion has been declining in recent years. However, a steadily increasing proportion of available capital is focused on Asia. Europe-focused dry powder, meanwhile, has remained consistent, accounting for around a quarter of total available capital. Nonetheless, the amount available in Europe is at a staggeringly high level. There seems little doubt that the big corporate investors are more attracted to the private ownership model than the listed one in today’s heavily bureaucratic environment.
From MM&K’s own direct experience, we have seen a healthy number of new clients in London, who are choosing to deploy some of their capital into UK and Continental European markets. This has involved them deciding to set up brand new offices in London and they are now looking to recruit whole new investment and back office teams from the London market place.
MM&K conducted a pulse survey earlier this year, seeking to identify what the latest trends were in UK PE and VC compensation levels. The results indicated that the typical level of increase in salary for investment professionals below Partner level at the most recent pay round (i.e. mainly January 2019) was above 10%. We see this as an amazingly high figure.
PE firms that are looking to invest large amounts of money into European deals need to ensure they have a happy and committed workforce, particularly in their front offices. The last thing they need is to be worrying about investment staff being tempted to look elsewhere by large new salary and bonus offers.
We are currently marketing our 2019 PE and VC Compensation Survey and are pleased with the high levels of interest we are seeing from participating houses this year. We have no doubt that firms are recognising the need to know what is happening to PE pay levels right now.
There seems little doubt that the PE, VC, Infrastructure and Real Estate sectors are entering into a new boom time period in the UK. A small part of this may be to do with the low value of the £ at the moment making investing in the UK even more attractive, counteracting the uncertainty being caused by the debacle of the Brexit process. But we are sure the larger part is just simply to do with the wall of money out there just waiting to be invested. Retaining and keeping motivated the best talent among one’s investment professionals has probably never been quite so important as it is today.
- July 20, 2019
Loans from EBT – recent HMRC developments on disguised remuneration schemes
Disguised remuneration schemes include tax avoidance arrangements that seek to avoid Income Tax and National Insurance contributions (NICs) by paying scheme users their income in the form of loans. Typically, the loans will have come from a “third party” such as an Employee Benefit Trust (“EBT”). In the view of HMRC, the loans were never intended to be repaid and so they are no different to normal income and are taxable.
These plans became popular in the mid-2000s but have been the subject of HMRC review for a number of years – with settlement terms being issued in November 2017.
As part of the continued developments in respect of those who have not settled with HMRC a “charge” on any outstanding loans was introduced as from 5 April 2019. This applies to all loans made since 6 April 1999.
Importantly, the loans are effectively deemed to be taxable income and will be subject to income tax and NICs.
Whilst it is likely that any organisation which has made these loans, now or historically, is already dealing with them, anyone who is unsure whether the loans connected to their EBT will be liable for the charge should ensure that it is compliant with the regulations.
For further information or to discuss any questions you may have, contact Stuart James.
- July 19, 2019
All change at the FRC – or is it?
The Financial Reporting Council (FRC) is embarking on a transition programme to morph into the Audit, Reporting and Governance Authority (“ARGA”) accountable to Parliament, after coming under heavy fire from the Kingman Review and others, including a report by the Competition and Markets Authority (CMA) on competition in the audit sector, which prompted BEIS to launch its own review of audit quality.
Kingman was scathing, calling the FRC a “ramshackle house, cobbled together with all sorts”. Key planks in its transition plan are diversity, culture and audit reform, with the last of these attracting much of the attention in light of recent corporate scandals. Also, the CMA has proposed that accounting firms should split their audit and advisory divisions and that FTSE 100 and 250 audits should be carried out by two firms, one of which is not in the “Big 4”.
Whilst Kingman called for the FRC to have statutory recognition and funding, it remains dependent in part on contributions from audit firms. Not surprisingly, perhaps, responses from some of those firms focus on and raise a number of questions about the FRC’s increased budget proposals for 2019/20.
The FRC’s transition plan includes the recruitment of 80 additional staff. What will they do? Some of them will be needed to resource the planned increase in the number of corporate reviews it plans to carry out. However, questions have been raised about the FRC’s ability to recruit in large numbers in a period of change and uncertainty. Scottish accountancy body, ICAS, has made the thoughtful observation that FRC has struggled to recruit at senior level and, to operate optimally, needs to address any perceived skills gaps. It should consider whether “existing resources need to be recalibrated”. In other words, does the FRC have the right people? Is it fit-for-purpose?
Kingman picked-up on the FRC’s methods of recruiting top staff, observing that it did not often employ open advertising or use headhunters and sometimes relied on the alumni networks of the largest audit firms. When the FRC transforms into ARGA, Kingman recommends that there should be limited overlap in senior management. Time will tell if this comes to pass. The FRC has committed to promote transparency, integrity and diversity in business and to reverse a loss of confidence in audit. Success in achieving those noble goals will depend, in part, on there being no perception of double standards for regulator and regulated.
Whilst audit has grabbed the headlines, the FRC (ARGA in future) also sets the UK corporate governance and stewardship codes. One of the consequences of the transition to ARGA is that the new regulator will have enhanced powers. There is a strong implication that the new regulator will be tougher than the old.
High standards of corporate governance are essential for a sustainable and successful business community and the UK leads the way. The case for change at the FRC is strong. The adoption of Kingman’s recommendations is evidence of that. Few (neutrals) are likely to disagree that everything practicable should be done to ensure that recent audit scandals are not repeated or that examples of excessive executive pay are not checked. However, care is needed to ensure that the freedom of the majority is not restricted and the burden on them is not increased unnecessarily, through the behaviour of the minority. Political intervention in executive pay, for example, has increased. The risk that this might increase further when the regulator, ARGA, is accountable to Parliament should be resisted strongly insofar as the UK continues to operate a free market society. Quis custodiet ipsos custodes?
For further information contact Paul Norris.
- June 27, 2019
PE/VC Fund Manager Compensation Survey
MM&K has been running its PE / VC compensation survey for more than 20 years now. Our survey is not just about the numbers, although it does cover that very well. It also provides invaluable insights into trends and direction of travel in the Private Equity / Venture Capital industry. Not only do we analyse compensation trends, we look at headcount, revenues, the structure of management fees, carried interest plans and GP commitment levels.
In terms of some recent remuneration trends, MM&K’s Pulse Report conducted in April showed an average 10% increase in Base Salary across all investment professionals in the latest pay rounds. This is a staggeringly high figure!
The PE and VC world in the UK and Europe seems to be growing larger and larger. The competition for talent is increasing all the time as new houses are coming to and opening up in the UK with big chequebooks willing to pay handsomely to recruit the best talent.
Our PE/VC Compensation Report is only available to participants, so don’t miss out on the opportunity to participate in our 2019 PE/VC Compensation Survey. Our submission deadline is coming soon, so please do contact us now to find out more.
- 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.
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:
• 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.
- October 24, 2018
Irish salaries beat UK salaries
MM&K recently compared data from the Willis Towers Watson cross industry databases to find out how salaries compare between Ireland and the UK.
The chart below compares UK and Irish employees’ salaries to their ‘Global Grade’ (the Willis Towers Watson Global Grading system assigns a job size to employees’ roles). We have analysed data across all job functions, producing a broad-brush comparison of Irish and UK salaries.
Since the results of this analysis depend strongly on the exchange rate, and the Pound is currently fairly weak against the Euro, we have used a historically average £=1.25 EUR for the study.
As you can see from our chart, the Irish junior staff workforce receive a slightly higher salary than their equivalents in the UK. At the middle management level, the gap begins to close, and for top executives, those in the UK are paid much more. The result is a 6% average differential* in Irish salaries over the UK. Analysing data we have from 2007, we found similar results – a 5% differential over the UK.
Although the average differential between Ireland and the UK has not changed much since 2007, we see there has been a change for top executives. In 2007 we found that top executives in Ireland were paid more than their UK counterparts. Clearly this dynamic has now reversed, with UK employees at global grade 20 receiving on average just under 50% more than Irish equivalents.
*the 6% average differential is a result of calculating the % difference in Irish salary vs UK salary for each Global Grade, then averaging those figures.
For further information please contact firstname.lastname@example.org
- October 23, 2018
Are you taking full advantage of tax-exempt share plans?
In last month’s newsletter, we explained why the Inclusive Ownership Fund (IOF), proposed in the September 2018 Labour Party Conference, may not be the best method of enabling workers to share in the wealth they create. We agree wholeheartedly that employee ownership can help increase a company’s productivity and encourage employees to identify more closely with the business; but there is already a good range of tax-advantaged share plans available. It is a shame that they are not more widely used!
There has been support for employee share ownership from all the main political parties for nearly 40 years. Their incentive effect is also recognised by institutional investors whose guidelines allow up to 10% of a company’s share capital to be issued for share plans every 10 years – the same percentage as proposed for IOF.
We now have tried and tested share plans which are flexible enough to reinforce most companies’ business and HR strategies. However, whilst 20 years ago (according to HMRC statistics) about 1 million employees participated in each of the approved Profit Sharing Share Schemes (now replaced by Share Incentive Plans) and SAYE Option Schemes, in 2016-17 participants in SAYE and SIPs had fallen to about 400,000 in each plan. We think that smaller companies, in particular, may have been put off by the apparent complexity of the legislation; even though MM&K have found it is possible to design share plans which are simple to administer and to communicate to employees.
Is your company taking full advantage of the opportunities to incentivise employees and provide them with valuable tax reliefs?
Using a SIP, every employee can participate up to the following annual limits:
• £1,800 of contributions from their earnings before income tax and NICs (or 10% of PAYE earnings, if less) to buy Partnership Shares
• £3,600 (2 for 1 match) in tax-exempt Matching Shares awarded by the company
• £3,600 in tax-exempt Free Shares awarded by the company, for example as part of a profit share.
In practice, only half of companies with SIPs award Matching Shares and only about a quarter award Free Shares.
Employees can contribute up to £500 per month over three or five years. At the end of this savings period, they can buy their company’s shares at a discount of up to 20% of the share price at the start. The discount is exempt from income tax and NICs.
Both SIPs and SAYE require all UK-resident employees who meet any qualifying period of service to participate and all must be offered the same terms (which can include the same percentage of salary). If these conditions are too onerous, companies may be able to use one of two ‘discretionary’ tax-advantaged share plans for employees generally:
EMI plans can be used to grant options over up to £3 million worth of shares to a company’s employees and the increase in the share value up to the exercise date is exempt from income tax and NICs and may qualify for entrepreneurs’ relief from capital gains tax.
These arrangements are available for smaller companies, with fewer than 250 employees and gross assets not exceeding £30 million, except for some excluded activities.
Options can be granted over shares worth up to £30,000 per employee and the gain on exercise is exempt from income tax and NICs.
Please contact Michael Landon if you would like to discuss in more detail how the above tax-advantaged share plans can be adapted to meet your company’s particular objectives.
- October 23, 2018
Value Creation Plans – genuine attempts at designing executive LTIPs or too complex to explain?
Some years ago, I attended the AGM of one of the UK’s biggest supermarkets. A shareholder asked a question about the proposed new executive LTIP. After a pause, one of the non-executives stood up and replied “it is too complex to explain”. I was reminded of this recently when MM&K inherited two Value Creation Plans (VCPs) adopted by clients who had recently appointed us.
In both cases, the client had been advised by the same firm and there was an apparent lack of appreciation among the Board and shareholders about the details of how the plans worked or the financial/economic consequences of having adopted them.
The VCP concept is simple – in essence VCP’s are stock appreciation rights settled in shares (or nil-cost options):
Stage 1: Award notional performance units to participants
• Performance units are not equivalent to shares; they define an allocation of future value created
Stage 2: Units convert into nil-cost options according to the value created
• TSR is calculated at a designated future date or dates
• If TSR exceeds a threshold compound annual growth rate, some or all of the units convert into nil-cost options
• The number of shares into which units convert is a function of the number of units awarded, the company’s TSR performance above the threshold and the market price of a share in the company on the conversion date
Stage 3: Nil-cost options vest and become exercisable
• Nil-cost options are held until a vesting date or dates
• On each vesting date, nil-cost options vest and become exercisable if the company’s TSR/share price growth has exceeded a specified minimum acceptable rate
• Post-vesting, options remain exercisable up to 10 years after the award of units
The above outlines the general principle but plans may vary in detail. For example, if units fail to convert (because TSR performance at the relevant date fails to exceed the threshold) VCP rules may provide for re-testing at a subsequent date. Re-testing performance and adopting LTIPs linked exclusively to TSR (share price growth, if there are no dividends) with no financial or operational targets are not the flavour of the month with investors in listed companies.
As ever, the devil is in the detail and there was a lot of impenetrable detail in the plan rules we inherited. However, the purpose of this piece is not to dwell on this or that form of words or complex formula. Our inherited VCPs were almost identical, clearly hewn from the same block, and yet they had been adopted by two very different companies in terms of size, activity and market positioning. There are good reasons for standardisation and “working smarter” but an incentive should be tailored to the business for which it is being designed. Corporate governance now has a much higher profile in relation to executive pay than hitherto. Incentive plans must be technically sound, work for the business and take account of applicable good governance principles.
But the most striking feature of our VCP inheritance has been the lack of appreciation about how the plans operate and potential outcomes. This emphasises the need for clear explanation. It also underlines the essential value of modelling a wide range of potential outcomes to minimise the risk of future surprises which might cause companies and their shareholders to regret their decision to adopt a VCP in the first place and there is the prospect of adverse publicity if payments are more generous that had been expected.
As a concept, VCPs tick the box of aligning executives with shareholders, insofar as they are linked to TSR or share price growth. Added features such as awards of notional performance units, complex conversion formulae and consequentially impenetrable rules are not necessary. It is, however, critical that companies, their shareholders and remuneration committees fully appreciate the plan which they have adopted – and its potential consequences.
As VCP’s attract no special tax advantages, it is hard to see what the added complexity brings to the table, when a similar result can be achieved with a much simpler share plan.
Paul Norris, Chief Executive
MM & K Limited
- October 18, 2018
How do not-for-profits design their long-term incentives?
MM&K investigated the LTIP policies for 59 of the largest not-for-profit organisations to answer this question.
Our sample consists of Charities, Housing Associations, Co-operatives, Building Societies, Mutual Insurance companies and Education Establishments (Universities and College Groups). It is important to note that the vast majority of these organisations do not operate an LTIP. Policy data is publicly available for 16 companies, which we have analysed.
Firstly, we found that the performance measures are very specific to the individual organisation. This contrasts with what we see in many listed companies, which often have very similar designs of LTIPs within certain sectors, especially the performance measures. For example, Oil & Gas exploration and production companies will often place a heavy weighting on a TSR based target. In contrast, in not-for profit companies the performance measures vary greatly; examples include return on capital, revenue, profit and net debt to EBITDA ratio. There are a few measures we do see recurring – such as employee engagement and customer service, but even these only occur in just over half of the companies we looked at.
This isn’t the only way in which the designs differ from listed companies. All the not-for-profit plans are cash-based (as there aren’t any shares available!) whereas it is much more common for listed companies to award shares through their LTIPs. Also, the earnings opportunity is generally more modest, with exceptions such as Liverpool Victoria offering a maximum opportunity of 300% of salary to its CEO.
In all cases, awards are granted annually and vest over a period of three years, a paradigm often seen in listed companies’ LTIP designs. We found only two cases in which an additional deferral/holding period is required. This is where the company defers the award for a further period of time (usually between one and three years), with no further performance conditions, a practice that is rapidly becoming the norm among listed companies.
For further information contact email@example.com
- October 18, 2018
Negative Feedback is Good for You
It is curious how many technical expressions slip into the common language with a meaning entirely different from their true meaning – and often opposite.
A couple of examples are “epicentre” and “lowest common denominator”. People commonly use “epicentre” to mean the very heart of the centre. The press might report “Tottenham was the epicentre of the London riots in summer 2011”. Users of the word clearly think that there is something especially central about the epicentre. But the word is borrowed from seismology and refers to earthquakes. The epicentre is the point on the surface of the Earth above (usually some miles above), the place deep underground, where the rock slip happened.
The lowest common denominator of a set of numbers is the lowest number that all the numbers in the set will divide into exactly. By definition it is as high as or higher than all the numbers in the set. If it is borrowed as a metaphor it should mean the best in the set. But people don’t mean that at all; they mean the lowest in the set, the slowest vessel in the convoy. lowest sounds appropriately disparaging.
Another expression misused in management is “negative feedback”. It is used to mean giving people performance feedback which criticises. as opposed to praising them. “You did a great job in that project but (points one to ten…)”
“Negative feedback has a very specific meaning in systems design. A common example is in electronic amplification. By taking a small amount of the output of the amplifier, reversing the polarity and feeding it back into the input stage, the signal becomes stabilised. If ever you have held a microphone too near a loud-speakers you will know what positive feedback does – the system starts screaming. Negative feedback damps down the system output and ensures a high quality output.
It occurred to me that performance reviewers do, unconsciously, provide negative feedback in the true meaning of the expression. They tell the appraisee the opposite of the truth to keep them on the rails. You don’t say “you did a total lousy job” even if they did. You say, you missed your targets, but the strategy report you wrote was good. Why? Because we want to keep them motivated.
On the other hand, to the successful appraisee we don’t say “you did a fantastic job, the best we ever saw”. We don’t want it going to their head. So we tone it down – “you did well, but here are some areas you could improve”. In other words, we tell a few white lies – we give negative feedback. We are not taught to do this – it’s something we pick up in the process of managing effectively. The important thing, however, is not to overdo it. Otherwise the appraisee will be confused. There are some famous stories about people who went into a meeting with the boss where he (women don’t make this mistake) was supposed to be firing them, and who came out thinking they had been promoted, he was so lavish with his praise!
For advice on Performance Management systems contact firstname.lastname@example.org
- September 27, 2018
When is an employees’ share scheme not an employees’ share scheme?
The answer is: when it’s an Inclusive Ownership Fund (IOF).
Few would disagree that an engaged workforce delivers greater productivity or that offering shares to employees creates direct engagement with the financial and economic performance of the business. But proposals announced at the Labour Party Conference this week that would require companies employing more than 250 people to set aside up to 10% of their shares to be held in an IOF fall short of the mark. In common with many proposals from political parties, a shortage of detail raises a number of questions.
Shares will be held collectively – who bears the cost of transferring shares to an IOF? Shares cannot be traded; individual employees will not enjoy the full benefits of share ownership – who will be the legal owner and who benefits from any capital growth? Voting will be in the hands of fund representatives – will they be subject to the same requirements to disclose how they have engaged with and taken account of the interests of the workforce as boards of directors will be under recent changes to corporate governance codes and regulation? The extent of an individual employee’s rights will be to receive dividends capped at £500 per year – any excess going to the Government.
This has been variously described as part nationalisation of the private sector and a tax on private sector companies. The Guardian https://www.theguardian.com/politics/2018/sep/23/labour-private-sector-employee-ownership-plan-john-mcdonnell referred to the proposals as “a new levy on private business”. Concerns have been raised about the potential adverse effect on investment in the UK, on productivity and employment if businesses curtail recruitment, go private/private equity owned or relocate overseas.
Whilst the upside is limited, it has to be said that there appears to be little downside for employees in Labour’s proposals. But if Labour’s motive is to promote wider share ownership, engagement and alignment, a framework already exists read more
- September 27, 2018
How will Remuneration Committees cope with their expanded remit?
Changes to UK corporate governance guidance and disclosure regulations introduced this summer have expanded the remit of remuneration committees. The effects reach beyond quoted companies. We have designed a programme to help navigate through the added complexity.
The UK Corporate Governance Code (UKCGC), applicable to companies with a premium listing in London, now requires remuneration committees to have delegated responsibility for setting remuneration for senior managers. It goes further, requiring remuneration committees to review workforce remuneration and related polices and the alignment of incentives and rewards with culture, and to take these into account when setting executive remuneration policy.
Regulations made under the Companies Act, which govern the content of the Directors’ Report, Strategic Report and Directors’ Remuneration Report (DRR), will require enhanced disclosures. Some of the changes will affect all companies, depending on size but only quoted companies are required to publish a DRR. Most of the changes come into force for financial years starting on or after 1 January 2019, so their effect will not be seen until the annual reports published in 2020 are available. However, some committees may wish voluntarily to comply in their 2019 annual report to test the water.
The objective is greater clarity about actions taken, the reasons why they were taken and their effect on key decisions made during the year to which the relevant report relates. Specifically in relation to the DRR, remuneration committees will have to make additional disclosures about read more
- September 27, 2018
Commons Committee on the tail of the fat cats again
The Commons Committee is chasing a myth again. Its chair, Rachel Reeves, has told the Mail on Sunday that the Committee is going to ramp up its attack on fat cats this autumn. She believes that executive pay is increasing at a rate that vastly exceeds increases for ordinary employees and which seemingly is at odds with the value created in the Company. Damien Knight shows that neither part of this belief is true. But fat cat pay is too easy a target for the press to leave it alone. Read more or for more information contact email@example.com
- September 27, 2018
Governance landscape at a glance “the most eventful year in history”
2018 has been, probably, the most eventful year in UK history on remuneration governance. The year saw the culmination of the Government’s wide initiative on corporate governance reform, with a revised UK Corporate Governance Code published by the FRC in July and new corporate disclosure regulations approved by Parliament in June. This was supplemented by a revised corporate governance code from the Quoted Companies Alliance in April and the draft of new governance principles for private companies from the Wates committee.
In addition we have had the reports on the first gender pay gap disclosure by companies, and a new AIM rule requiring all AIM-listed companies to publish by the end of September details of the recognised corporate governance code they intend to adopt and their level of compliance.
Starting from last December we have now had two reports from the Investor Association of the voting “name and shame list”, showing AGM resolutions that fail to gain more than 80% of the votes. Read more
For more information contact: firstname.lastname@example.org
- September 17, 2018
SEC rescinds guidance providing regulatory support for using proxy advisors
On Thursday 13th September, the SEC rescinded two guidance letters from 2004 in a move that will potentially reduce the influence that ISS has on, among other things, Say-on-Pay votes.
These guidance letters informed investment managers that outsourcing their proxy voting decisions to proxy advisors would satisfy their obligations as fiduciaries to vote their shares while avoiding potential conflicts of interest with regards to companies whose funds they may be managing. For example, if Vanguard has proxies to vote for a company in one of its index funds, and that company also uses Vanguard in managing its pension fund, Vanguard could conceivably be influenced by its business relationship with that company to vote with management on the proxy matters. By essentially delegating to ISS or Glass-Lewis the votes on its shares in that company, Vanguard would be “cleansed” of potential allegations of conflict, based on the 2004 letters. With that guidance rescinded, Vanguard and others can choose to vote according to their own determination of the merits of each proxy resolution, which may or may not correspond to proxy advisor recommendations.
Critics of these SEC guidance letters have argued that they effectively institutionalized proxy advisory firms, especially ISS, as de facto regulators without the oversight required of actual regulators, and that over-reliance on such firms may not be in investors’ best interests.
ISS’s business model is arguably built largely on regulatory requirements, especially the 2003 SEC rule mandating that investment managers disclose their proxy voting policies (and votes) and the 2010 Dodd-Frank Act mandating Say-on-Pay, among other provisions. Many of the larger institutional investors have built internal governance expertise to guide voting decisions, using ISS data to help them screen companies to target, while smaller funds have generally found it more cost effective to meet these requirements by essentially outsourcing their votes to ISS. The larger firms, however, have also outsourced many of their votes due, in part, to the 2004 guidance letters because they are more likely to sell investment management to the companies that they also invest in.
Research indicates that ISS has gained significant influence over shareholder voting and, consequently, on corporate governance policies. As their influence has grown, ISS’s dominance has been increasingly challenged by public companies and certain governance critics who have focused on ISS’s own potential conflicts of interest and the quality of the research and standards behind their recommendations.
Following more recent SEC guidance for casting their votes in their client’s best interest should provide investment managers a strong basis for defending their voting decisions, even as they reduce their reliance on proxy advisors. The impact of this rescission is not expected to be very significant in terms of how investors generally oversee compensation governance. But it does portend continued push-back on ISS’s influence as the SEC prepares for its November roundtable on potential regulation of proxy advisors.
However, the outcome is uncertain. Our advice from s UK proxy advisor is that the drafting of the original letters was poor, and the SEC may well issue new guidance.