- April 20, 2019
2019 MM&K Private Equity / Venture Capital Breakfast Seminar
In early April, MM&K held a PE/VC Breakfast Seminar for the participants in its last three PE/VC Compensation Surveys. At the seminar the 2018 Landscape of the Private Equity / Venture Capital industry was discussed. We also discussed the outlook on what 2019 may hold for the industry.
Prior to the event, MM&K organised a 2019 Pulse Survey, that was sent out to all of the invitees to the seminar, to get a picture of the most up-to-date Remuneration and Staffing trends in the UK and European PE/VC industries. Also, some of the interesting insights and findings from the 2018 MM&K PE/VC Compensation Survey were presented to compare with the results of the 2019 Pulse Survey.
The event opened with a networking opportunity for all the attendees and closed with a vocal Q&A session.
2019 MM&K Private Equity / Venture Capital Pulse SurveyThis short Pulse Survey focuses on the most recent developments in the UK and European Private Equity / Venture Capital industry. The Pulse Survey is run for the benefit of MM&K’s PE/VC Compensation Survey participants, and provides them with an outlook on the most up-to-date trends in compensation and staffing levels in the PE/VC industry.
91% of participating houses indicated a salary increase across all of their professionals at their most recent review date. However, only 15% indicated increases in bonus levels for their investment professionals (over 2018).
About 70% of the participants indicated they focused on selected groups of staff when determining bonuses for last year’s performance. 86% of firms expect an increase in the number of investment professionals in 2019.
All in all, there remains perhaps a surprisingly high level of confidence in the industry, which is encouraging to see.
If you are working in a Private Equity / Infrastructure / Venture Capital House and you believe that your firm might like to participate, please contact Margarita Skripina or request your questionnaire here.
- April 18, 2019
Recent HMRC announcements relating to EMI options
HMRC recently made new announcements about tax-advantaged Enterprise Management Incentive (EMI) share options in its Employment Related Securities Bulletin 31 (21 March 2019) and in updated Share Valuations guidance (1 April 2019).
Errors in notification of EMI options to HMRC
When a company grants an EMI option, it must notify HMRC of the grant through the online reporting system within 92 days of the date of grant; otherwise the option will not qualify for tax exemptions.
If the company realises that it has made a mistake in its notification about the grant of EMI options, the consequences depend on the period which has elapsed since the date of grant.
• If it is still within 92 days of granting the options, the grants can be re-notified through the online system within that 92-day period. The originally notified options should then be cancelled on the next EMI annual return.
• After 92 days, but within nine months of the original grant date, provided it has a reasonable excuse for not re-notifying within the 92-day deadline, the company should notify HMRC of the facts. If HMRC accept the explanation, they will issue a “reasonable excuse code” which will allow the company to re-notify the corrected options through the online system. Again, the originally notified options must be cancelled on the next EMI annual return.
• After nine months of granting the EMI options, the legislation does not allow errors or omissions to be corrected. The company must notify HMRC of the error. If HMRC regard the error as material and that it may cause the options to fail to meet the legislative requirements, the options will remain in existence but will not benefit from the EMI tax exemptions.
Impact of IFRS 16 on a company’s gross assets
The tax advantages of EMI options are intended only for small companies. The EMI legislation therefore does not allow EMI options to be granted if the company’s gross assets (including the gross assets of its subsidiaries) exceed £30 million at the date the EMI options are granted. (The test does not need to be met at the time of exercise.)
HMRC has updated its guidance on the gross assets test to confirm that if a company uses international accounting standards, IFRS 16 will apply from January 2019 in determining the value of the company’s assets on its balance sheet.
Working time declarations by EMI option holders
At the time of grant of EMI options, the employees must sign written declarations that they spend at least 25 hours each week or, if less, 75% of their working time working as employees for the company or a qualifying subsidiary. Employees have to make new working time declarations for each new grant of EMI options.
HMRC have confirmed that the declaration must be made at the time of option grant and it cannot be backdated.
Restrictions on shares to be acquired through EMI options
The option agreements for EMI options should contain all the terms and conditions of the options and any restrictions on the shares to be acquired on exercise of the options.
HMRC have stated that where restrictions on shares have not been notified to option holders at the date of grant the company should seek to remedy this as soon as possible. HMRC’s advice should be sought as to whether any proposed retrospective action could result in the options losing their tax-advantaged status.
Valuation of shares for EMI options
Where shares to be acquired on exercise of EMI options are not listed on a recognised stock exchange, the value of the shares must be agreed by HMRC Shares & Assets Valuation (SAV) before the date of grant. This may be crucial in determining the taxable amount when the options are exercised.
In practice, where the shares are traded on AIM, SAV often agree to accept the quoted AIM price. However, the value for unquoted shares must be based on an accepted share valuation methodology.
HMRC have confirmed that agreed valuations will remain valid for 90 days. The previous limit was 60 days.
For further information contact Mike Landon
- April 17, 2019
New Directors’ Remuneration Reporting Regulations
On 10 April 2019, the Government laid before Parliament a new set of revisions to the Directors’ Remuneration Reporting Regulations (DRRR or “Schedule8”).
After the wholesale revision to the DRRR in 2013, the regulations remained pretty much unchanged until July, 2018. The 2018 Companies (Miscellaneous Reporting) Regulations then introduced a number of changes to the Companies Act aimed at improving disclosure and corporate governance. Included in this Statutory Instrument were some key changes to the DRRR, in particular:
1. The requirement for UK companies with more than 250 employees to publish, in the form of a table, the ratio of the total pay and benefits for the chief executive to the equivalent figure for UK employees at the lower quartile, median and upper quartile. The requirement, starting with FY 2020, is to report the most recent two years and then steadily build up to a nine-year table over time.
The 2013 regulations required companies to compare the percentage change in the latest year of the remuneration of the chief executive with that of employees of the company taken as a whole; this comparison was to be made for the salary, taxable benefits and annual bonus figures in the single figure table. The 2018 regulations added a pay ratio as well as a pay movement comparison, and added the requirement to report this for a period building up to 9 years.
2. A second important change was to break-out the impact on remuneration of the effect of company share price changes, both in the remuneration table for the year and in the scenarios charts for future remuneration. The old scenario charts ignored share appreciation completely, which proved a serious omission when the forecasts proved wildly low due to stock market movements. The 2018 regulations went the other way – the scenario modelling had to assume 50% price appreciation over the plan period.
As last year’s changes to the DRRR apply for reports for financial years starting 1 January 2019, no companies have yet had to apply them. But the new 2019 regulations apply to reports for years starting on 10 June 2019, so companies with a year start between June and December will find themselves adopting both new sets of rules at once.
The Government has introduced the latest changes to the regulations to bring them in line with the 2017 EC Shareholder Rights Directive II (SRD II). This directive was mainly concerned with flows of information between companies, investors and intermediaries; however, it included some articles aimed at improving the governance of directors’ remuneration.
It is important to note that, as well as requiring certain specific items of disclosure, SRDII mandated the EC to prepare full guidance on the contents of the remuneration report, and the Commission published this guidance on 3 March 2019. Had BEIS followed this guidance for the UK regulations, the new DRRR would have become very onerous without adding any great benefit for companies or shareholders. Fortunately, the guidance is not mandatory and the UK Government has chosen to ignore it and only to implement the specific points mentioned in SRD II. These are limited in their scope. The changes in the UK DRRR are as follows:
1. The pay movement comparison in the earlier regulations has been extended from one year to five years on a “building up” basis. So there are now potentially five years of pay movement comparisons and nine years of pay ratios to be reported.
2. The pay movement comparison has been broadened from the chief executive to all directors; but not the pay ratio analysis, which is curious. It is not evident that this change provides stakeholders with any insights that go beyond the movement for the chief executive for the additional work involved by the reporting company. But these changes are necessary to comply with the specific requirements of Article 9b 1. of SRD II
3. The Single Figure table is required to break out separate totals for fixed remuneration and variable remuneration.
4. Where aspects of directors’ remuneration are required to be disclosed under the regulations, it is made clear that this includes the chief executive and deputy chief executive (if any). This prevents the company from hiding the chief executive’s pay by excluding him or her from board membership.
5. The regulation introduces a privacy restriction on including certain categories of personal data. Subject to this, the directors’ remuneration report must be kept available for a period of at least ten years.
6. Throughout the report, the requirement to report has been broadened from “quoted companies” (ie UK companies on the official list of a main exchange) to include “traded unquoted companies” (this covers companies that were previously listed on a main exchange but are no longer listed. It does not include AIM-traded companies.)
7. The regulations expand on the detail that is required to be given about the decision making process for the determination, review and implementation of remuneration policy.
For further information, contact Damien Knight
- April 16, 2019
Don’t miss the deadline for online share plan returns
The deadline for submitting annual online employee share plan returns to HMRC for the tax year ended 5 April 2019 is 6 July 2019. This is also the deadline for registering new plans which were first operated during that tax year.
We recommend that companies should try to complete registrations and annual returns well before then, as there are often last minute technical hitches.
Which plans should be reported?
Returns must be submitted for each individual share plan which is registered with HMRC. Plans include:
Tax-advantaged SIP, SAYE and CSOP
If the company operates more than one of any of these plans, for example if a plan was replaced with a new one after 10 years (as opposed to being renewed), there must be a separate return for each plan.
Tax-advantaged EMI options
A single return should be made in respect of all Enterprise Management Incentive (EMI) options, even if more than one plan is operated or if there are no formal plan rules.
“Other” share plans
All other non tax-advantaged share plans (often referred to as “unapproved”) or arrangements for employees to acquire shares should be reported as “Other” plans.
A company can register all these arrangements as a single “Other” plan or as two or more separate plans. If more than one “Other” plan is registered, a separate annual return must be made for each.
Where a set of rules contains more than one type of plan, for example an unapproved share option plan with a tax-advantaged CSOP schedule, this should be reported as two separate plans.
Which events should be reported?
The annual return should provide details of:
• the grant, exercise, cancellation, lapse or release of share options
• the grant, vesting, cancellation, lapse or release of other conditional share awards (eg under a standard “LTIP” or deferred bonus)
• all share acquisitions under a SIP or through other employment-related arrangements such as the award of growth shares or other restricted securities
• SIP shares forfeited or ceasing to be subject to the plan
• other taxable post-acquisition events, including the lifting of forfeiture restrictions on shares.
In the case of a tax-advantaged SIP, SAYE or CSOP, the company must also report amendments to “key features” of the plan, ie those which meet the requirements of the legislation for that plan, and adjustments to SAYE or CSOP options following a variation in the company’s share capital. The company must declare that the plan continues to meet those requirements after the changes have been made.
Different arrangements for EMI options
You should note that, to qualify for tax relief, the grant of tax-advantaged EMI options must be reported online within 92 days of the date of grant. If no EMI arrangement has already been registered, this must be done before the grant can be reported.
We recommend that companies should print out HMRC’s acknowledgement of option notifications, as it will not be possible to access this again at a later date.
What if there have been no reportable events?
If there have been no reportable events during the tax year, to avoid penalties the company must still make a “nil return” for each of its registered share plans.
If a plan has been terminated, the company can specify a “date of final event” on the annual return. A final online return must be submitted for the tax year which contains the “date of final event”, so it may be wise to specify a date towards the end of a tax year rather than at the start of a new one.
Even if a plan has been registered by mistake, the “date of final event” must be specified and a nil return submitted for the tax year.
Penalties for late and incorrect submissions
If a share plan return is not submitted by the 6 July 2019 deadline, a first late filing penalty of £100 will be issued.
Additional automatic penalties of £300 will be charged if the return is outstanding three months after 6 July 2019, and a further £300 if it is still outstanding after six months. If a return is still outstanding nine months after 6 July 2019, daily penalties of £10 per day may be charged.
HMRC can impose a penalty of up to £5,000 for a material inaccuracy in a return, unless this has been corrected by an amended return “without delay”.
For further information contact Mike Landon
- March 28, 2019
Pending changes to Directors’ Remuneration Report Regulations
On 3 March the European Commission issued new guidelines on the standard presentation of the remuneration report under Directive 2007/36/EC. This was to comply with a mandate presented in Article 9(b)6 of the 2017 revisions to the second Shareholder Rights Directive (SRD II). The guidelines are non-binding and the UK Government has to decide how far it will translate the new guidelines into revised regulations by the deadline of 19 June.
The original Shareholder Right Directive was issued in 2007 and was concerned with strengthening corporate governance and particularly the rights of shareholders in relation to voting at general meetings. It applied to companies which have their registered office in a member state trading on a regulated market situated in a Member State. This definition includes Main Board listed companies on the London Stock Exchange but not AIM companies, which fall into the category of “exchange-regulated’ rather than EC regulated.
In 2017, the EC issued revisions and extensions to the Directive, aimed at strengthening the first Directive and encouraging institutional investors and asset managers to take a longer-term view of the market. One new set of articles focused on directors’ remuneration:
• Article 9a covered the requirement of companies to prepare a remuneration policy and to submit it for a (binding or non-binding) shareholder vote in general meeting on inception and whenever a material change is made and, in any case, at least every four years. The Article covered the information to be provided in the policy, which is very close in content to that required for UK companies under Schedule 8 (the 2013 Directors’ Remuneration Reporting Regulations, DRRR) as amended by the Companies (Miscellaneous Reporting) Regulations 2018, and the associated voting requirements of the Companies Act.
• Article 9b covered the information to be provided in the remuneration report (ie the implementation report for the previous year) and the requirements to submit it to a shareholder vote. Again, the requirements are very similar to the UK regulations. However, 9b(6) mandates the Commission to adopt guidelines to specify the standard presentation of the information laid down. These are contained in the communication from the Commission on 3 March labelled “Guidelines on the standard presentation the remuneration report under Directive 2007/36/EC”. The aim of the Commission is to achieve a standard format across Europe. Unfortunately, the requirement is more detailed than the DRRR, especially in relation to individual directors’ performance over time and their pay movements compared to average employee remuneration.
Fortunately for UK companies, it looks as if the Government does not intend to adopt the detail of these guidelines. We spoke to BEIS who told us that they are proposing to put a new statutory instrument (SI) in front of Parliament in the next few weeks. It will be accompanied by a table comparing what is already in place in the DRRR with what needs to be implemented under SRD II Article 9. The regulations will be mandatory, but they do not intend to require companies to adopt the full EC guidelines.
If the new SI is approved by both houses, it will enter into force on 10 June, which is the transposition date for SRD II. However, it will contain various transitional provisions for companies and it will not need to be adopted by companies for reporting until 2020.
BEIS will be publishing FAQs on the new regulations and the GC100 Investor Group will be updating their own Guidance. BEIS are thinking of appending the final EC guidelines for information, allowing companies, if they choose, to adopt some of the new guideline provisions, if they appear useful. We got the impression that all this will go ahead whatever the Brexit outcome.
For further information, contact Damien Knight
- March 28, 2019
FRC consults on Stewardship Code
The Financial Reporting Council (FRC) has published a consultation paper on a new Stewardship Code that sets substantially higher expectations for investor stewardship policy and practice. The proposed changes call for higher transparency regarding institutional investors’ stewardship activities and encourages more engagement with companies. The proposed changes have significant potential consequences for investment organisations and the companies in which they invest.
What is happening?
Under the proposed changes, all signatories of the Code would be required to make public disclosures about their stewardship activities. This could address current concerns about investors’ inadequate engagement with the companies they own. Although we currently have several corporate governance codes which require companies to engage with shareholders, they place no such obligation on investors.
Other key proposed changes include requiring signatories to establish an organisational purpose, strategy, values and culture. This aligns the draft 2019 Code with the UK Corporate Governance Code, which it is designed to complement. The draft Code also makes explicit reference to environmental, social and governance (ESG) factors. Signatories are expected to take into account material ESG factors, including climate change, when fulfilling their stewardship responsibilities.
All signatories would be required to make public disclosures about their stewardship activities and their assessment of how effectively they have achieved their stated objectives. Reporting would be in two parts: a Policy and Practice Statement upon signing the Code and an annual Activities and Outcomes Report.
Shareholder Rights Directive
The FCA is also undergoing a consultation, proposing regulatory measures to implement the provisions of the amended Shareholder Rights Directive (“SRD II”). The Directive comes into effect in June 2019 and, assuming a transition period for EU Withdrawal is agreed, will need to be transposed in the UK.
SRD II also aims to improve the effectiveness of stewardship and long-term decision-making in listed companies. It will do this chiefly by improving the transmission of information in the investment process; therefore, major business impacts on listed companies, institutional investors and intermediaries are expected. Through increasing transparency and awareness, the SRD II hopes to shed light on the extent to which investors fulfil their responsibility as stewards, of both the companies they hold shares in and the assets they manage for their clients.
Tasked by SRD II, the European commission has published draft guidelines which recommend a standardised presentation of remuneration reports, subject to consultation until 21 March 2019. We have summarised the key points in the guidelines:
• Introduction – a general overview (key events, changes in directors, changes in policy or its application) followed by more details on the performance and business environment and major decisions on remuneration and, where applicable, how the vote or views of shareholders on the previous report were taken into account.
• Remuneration – reporting each component, divided into fixed, one-year variable and multi-year variable pay
• Performance metrics and outcomes – for variable pay plans, including minimum and maximum targets, actual performance and how any discretion was applied.
• Share-based remuneration – share-based remuneration tables.
• Malus and clawback provisions
• Comparison of annual change in each director’s remuneration with company performance and average employee remuneration over five years
• Response to AGM voting – how the vote at the previous general meeting was taken into account.
Joint discussion paper
As you may have expected, the FRC and the FCA have teamed-up to tackle the issue of stewardship, publishing a discussion paper on ‘Building an effective regulatory framework for stewardship’. The paper aims to advance the discussion about what effective stewardship should look like, expectations for financial services firms, and how this can be best supported by the UK’s regulatory framework. The paper notes that some benefits of effective stewardship – eg higher long-term investment returns – accrue not only to the firm that incurs the cost of exercising stewardship, but also to all other investors. As such, some investors may not exercise stewardship as fully as they otherwise might and instead ‘free-ride’ on the stewardship of others.
The FRC’s proposed Stewardship Code aims to both increase the expectations set by SRD II and expand its scope. The ‘new rules that are due to come into effect under SRD II intend to enhance transparency about how equity investors exercise stewardship and “raise the bar” for stewardship across the market. However, we are considering whether the UK regulatory framework should aspire to go further than the provisions of SRD II’.
Beyond the EU
The EU is not alone in taking steps to improve stewardship. In November, the US Securities and Exchange Commission (SEC) held a roundtable addressing whether the capital markets system can be improved – in context of the principal/agent problem and investor participation. The three topics for discussion were the proxy voting process, shareholder proposals and proxy advisory firms.
Why should remuneration committees be interested in the proposals?
The consultations currently taking place have significant implications for remuneration committees. Under the FRC’s proposed changes, signatory fund managers would be urged to look harder at whether companies fit their investment strategies. Remuneration structures and performance targets play a large role in this. Further, they would be required to take a more active approach in engaging with and influencing committees.
Committees should also take note of the proposed Stewardship Code’s focus on ESG issues. In December, Shell announced that they will be linking executive pay and carbon emissions, becoming the first energy company to do so. If investors are required to take ESG factors into account, we will likely see more and more companies linking ESG criteria to executive pay in the future.
The steps taken under SRD II to increase transparency and awareness will have a similar effect, but remember that the requirements under SRD II are compulsory for listed companies and asset managers in the EU (whereas the FRC’s Stewardship Code is voluntary). Remuneration committee members should be paying particular attention to the European Commission’s remuneration report guidelines.
What they should be doing in response?
Remuneration committees have a responsibility to communicate with investors. Some committees may find it difficult to engage with their investors; some of the more common complaints we have heard include failures to respond (either at all or in a timely fashion) and the use of proxy advisors, who are more remote from the company. The proposed changes discussed in this article have the power to change this – hopefully, committees will have provided input to the consultations in order to get the best outcome. They should also be prepared to take advantage of any changes, if and when they come into effect.
MM&K are experts in advising remuneration committees on a range of issues surrounding corporate governance, regulatory and disclosure requirements. We have a wealth of experience helping committees communicate with investors. For queries and further information, please contact Paul Norris or Damien Knight.
- March 23, 2019
The AIM Market – heading for trouble in 2019?
On the face of it, things do not currently look too rosy for the AIM market. There has just been one new IPO on AIM since the turn of the year. In the same period last year, there were nine.
Indeed, last year as a whole saw a regular stream of IPO’s on AIM. In 2018 there were 9, 19, 6 and 8 listings respectively, per quarter.
The health of any market is shown, to a greater or lesser extent, by the number of new companies that are willing to go through the time and (considerable) expense to raise finance.
Moreover, given that Q4 of 2018 saw an almost record breaking number of trade and Private Equity M&A deals (748 in total), it would be easy to conclude that the AIM market is facing trouble with company owners increasingly considering alternative ways of obtaining the finance to either exit or grow their business.
However, as always when confronted by headlines and statistics it is worth digging deeper to understand the broader picture.
On a macro level, whilst the 43 admissions of 2018 is down from 50 l in 2017, it is still one more than the 42 that occurred in 2016. This would seem to indicate that there is no overall downward trend –other factors are likely to be at play.
The overwhelming weight of evidence indicates that the principal reason for the lack of AIM IPOs so far this year is nervous investor sentiment generally. There is no shortage of companies seeking admission to AIM.
We have recent first-hand knowledge of companies who are keen to IPO but have had to delay on advice from their brokers that the market would not buy at a price that would have made the transactions viable.
It is undeniable that in the short term, the uncertainty of Brexit has caused a pause in making such “public” investments by Institutional investors. However, monies have been raised and need to be placed in order to grow. With the comparable difficulties of finding the “right” investment to place PE money, it is likely that, once the markets have settled (hopefully by this summer) a flurry of deals will come to AIM.
Ironically, whilst there are risks associated with any investment, the requirements of AIM Rule 26 that each AIM company must adopt a corporate governance code, identify the chosen code on its web-site and explain how it complies (or why it has not complied) with that code makes the AIM market a better regulated place for making investments.
We will continue to watch the AIM market with interest and will provide updates throughout the year. For further information or to discuss any questions you may have, contact Stuart James.
- March 22, 2019
Executive pensions – do you know your limits?
In the past, pension benefits used to form a substantial proportion of top executives’ total remuneration. This was not just because their entitlements were based on higher salary levels than employees generally but also because these executives had more generous percentage employer contributions or accrual rates. Moreover, the full value of directors’ pension rights was not always apparent because of incomplete disclosure in companies’ accounts.
The combination of controversy about executive pay levels and the Government’s wish to reduce the costs of tax reliefs has now led to severe restrictions on the value of executive pension benefits.
Corporate Governance Code and investor guidelines
The July 2018 UK Corporate Governance Code, which applies to all companies with a premium listing, requires that “pension contribution rates for executive directors, or payments in lieu, should be aligned with those available to the workforce”.
In its November 2018 Principles of Remuneration, the Investment Association (IA) supported this provision, interpreting it to mean “the rate which is given to the majority of the company’s workforce”. The IA went on to announce on 21 February 2019 that the Institutional Voting Information Service (IVIS) will:
• ‘red-top’ companies which pay new directors, appointed from 1 March 2019, pension contributions which are not in line with the majority of the workforce; and
• ‘amber-top’ companies where any existing executive director receives a pension contribution of 25% of salary or more.
The Directors’ Remuneration Report Regulations now require listed companies to disclose in their annual reports the value of all pension-related benefits, including payments made in cash or otherwise in lieu of retirement benefits and benefits from participating in pension schemes. The Remuneration Policy approved by shareholders must include the maximum pension benefit and, if this amount is exceeded, the directors who authorised the payment may be liable for any resulting loss.
Annual contribution limits
Changing tax rules may have had an even more dramatic impact. From April 2015 the annual limit on tax-relieved pension contributions for a member of a registered pension scheme has been reduced to £40,000 (or 100% of taxable earnings, if less). This ‘annual allowance’ includes contributions by the employee, employer or any third party to a money purchase/defined contribution (DC) arrangement and additional accruals to a defined benefit (DB) scheme. If the limit is exceeded, a tax liability arises (the ‘annual allowance charge’).
Individuals can, however, carry forward any part of the £40,000 allowance which was not used in the previous three tax years, provided they were members of the pension scheme in those years.
Since April 2016, the standard ‘annual allowance’ has been reduced for high earners with an ‘adjusted income’ (which includes total taxable income plus employer pension contributions) of more than £150,000. The annual allowance is ‘tapered’ from £40,000, for those with ‘adjusted income’ of up to £150,000, down to £10,000, for individuals with an ‘adjusted income’ of £210,000 or more.
Those who have already drawn from DC schemes
Since April 2017, there has been a substantially lower ‘money purchase personal allowance’ of £4,000 for individuals who have already drawn money from their DC pension schemes under flexible access arrangements. This is to discourage people from obtaining additional tax relief by reusing funds which have already received tax relief. This £4,000 allowance cannot be topped up with unused allowances from earlier years.
In addition to the annual contribution restrictions mentioned above, there is a ‘lifetime allowance’ which limits the total value of pension benefits which an individual can draw without an additional tax charge to £1,030,000 (2018/19). This includes the value of all an individual’s pensions, through DC and DB schemes, but not the State Pension.
For DC schemes, including personal pensions, the value is the pension pot used to fund retirement income and any lump sum. For DB schemes, the expected annual pension is multiplied by 20 and any lump sum is added to the total. So an individual on a 60ths accrual rate and 40 years of service would exceed the lifetime allowance if his final salary was £78,000 (40/60 x £78,000 x 20 = £1,040,000).
Any pension pot worth more than the allowance is subject to a tax charge of 55%, if paid as a lump sum. If paid as a pension, the tax charge is 25%, but the gross amount is also subject to the individual’s marginal tax rate.
Some executives have preserved a higher earlier level of ‘lifetime allowance’, for example at £1.25 million by taking out Individual Protection 2016 or Fixed Protection 2016. Those with Fixed Protection, in particular, need to ensure that they do not build up any further pension benefits after 5 April 2016. They should have opted out of automatic enrolment and any life assurance cover may have to come from a different source than the pension scheme.
What should companies be doing about this?
It is clear that the days of generous executive pensions are now over. It is becoming standard practice for companies’ contribution rates to executive pensions to be equalised with the majority of the workforce. This can be achieved easily for new appointments and promotions. For existing executives, the contribution rate is part of the employment contract and cannot be reduced except by mutual agreement. However, companies will wish to note that the IA Principles of Remuneration state that shareholders expect contribution rates for incumbent executive directors to be reduced as soon as possible and that no compensation should be awarded for this change. Recent press reports suggest that the major UK banks have adopted this approach.
This reduction in pension entitlement will change the balance between the fixed and variable elements of remuneration. Depending on their remuneration strategies, companies may choose to readjust this new balance by modifying other parts of the total package.
In cases where the statutory annual and lifetime allowances prevent executives from receiving even the standard workforce pension contributions, the practice of paying cash in lieu of pension is likely to continue. In determining the size of any cash alternative, companies should take into account the extra employer’s NICs costs of cash payments (in comparison with pension contributions) and whether the payments will increase entitlement to bonuses and other benefits.
This article is intended to draw attention to possible implications arising from the variety of restrictions on building up pension benefits for executives. Please note that MM&K’s consultants are not pension experts and you should obtain advice from an appropriate professional adviser before taking any action on any of the issues discussed.
For further information contact Mike Landon
- March 20, 2019
International Share Incentive Plan – a case study
This case study explains how a FTSE 250 company, with MM&K’s help, adapted a UK Share Incentive Plan (SIP) for its employees in Germany and Luxembourg.
The Company regards employee ownership as essential to aligning employees and shareholders by creating a common interest in the growth in value of the Company.
The UK SIP
The Company established its UK SIP in 2017 to give all permanent UK-based employees an opportunity to invest in partnership shares annually up to the lower of £1,800 and 10% of their taxable earnings. Each employee can choose to make either monthly salary deductions or a single annual contribution, following payment of annual bonus.
The Company matches each partnership with an award of one free matching share. Provided that the partnership shares and the matching shares are held in the SIP Trust for five years, no tax liability will arise on participants in respect of those shares.
Replicating SIP in Germany and Luxembourg
The Company’s business in Germany and Luxembourg was growing. Its workforce in those countries was expanding and the Company wished to provide equity incentives on similar terms to those provided to the UK workforce. Unfortunately, neither Germany nor Luxembourg has any tax advantaged legislation equivalent to the UK SIP.
A challenge was to design a plan whereby German and Luxembourg employees could be awarded matching shares when they purchased partnership shares without:
(a) a ‘dry’ tax charge arising on the award date, as employees would receive no benefit from their matching shares until after the end of a three-year forfeiture period; or
(b) additional cost (such as hedging costs) to the Company for the provision of the matching shares.
Additionally, the Company did not wish to establish an offshore employee benefit trust to ‘warehouse’ shares during the three-year forfeiture period.
The plan for Germany and Luxembourg is administered by a professional administrator, which also acts as nominee for the employees. The administrator collects monies from employees out of their post-tax income and purchases partnership shares for them participants as nominee. As such, it holds the legal title to both partnership and matching shares on behalf of the participants.
No ‘dry’ tax charge arises in respect of an award of matching shares . Instead, the tax liability is delayed until after the end of the forfeiture period when the shares are transferred to them by the administrator in its capacity as nominee.
No additional cost, such as hedging cost, is incurred by the Company, which pays for the matching shares at the time of award.
Whilst participation terms are similar to the UK SIP, modifications had to be made to deal with issues under local laws. We worked closely with local lawyers to ensure the procedures for making salary deductions, acquiring partnership shares and awarding matching shares avoided the law of unintended consequences.
Whilst German and Luxembourg participants do not enjoy similar tax advantages to their UK colleagues, the outcome ensures that the charge to tax coincides with the receipt of benefits and the Company’s commercial objective to provide an opportunity for substantially the whole of its workforce in the UK, Germany and Luxembourg to participate in equity on similar terms has been achieved.
For further information contact Mike Landon
- February 27, 2019
The Holt – MM&K – Buyouts Insider North American PE Compensation Survey 2018
Holt Private Equity Consultants, MM&K’s allied firm in the US for Private Equity compensation matters, recently published the results of its North American PE Compensation Survey. This survey is the sister survey of our European PE and VC Compensation Survey. The results from the North American survey make for interesting reading.
The survey analyses compensation data from over 100 North American PE and VC firms. The headlines include:
• In 2018, compensation in North American Private Equity and Venture Capital spiked for many employees.
• For non-partner level employees, the median total cash (salary + bonus) increased by 20%.
• The biggest increases were seen at the Associate and Vice-President levels.
• The standard model of two and twenty still pertains.
• Partners tend to take 71% of the carry pot.
• The vesting of carry plans now is spread over a longer period. The typical length of time that it takes to get to full vesting is now eight years.
• Only 31% of VC funds in North America require a hurdle rate of return before carry clicks in.
MM&K is pleased to announce that copies of the North American survey report are available to be purchased from us at a price of £2,000 (plus VAT).
A copy of the Preview of the North American PE Compensation report can be found here:
- August 30, 2018
Investment Association register of AGM votes 2018
On 30 August the Investment Association published its analysis of voting in the 2018 AGM season. Company resolutions are added to the register if they fail to achieve an 80% vote in favour.
The picture is rather confused. For all listed companies the number of resolutions not achieving the hurdle dropped from 68 in 2017 to 61 in 2017. But the number in the FTSE 100 doubled from 9 to 18.
Most of the “failed” failed votes were for the advisory vote on remuneration implementation. Only 12 in total concerned the remuneration policy. This is remarkable in a year when many companies would have been coming back to shareholders to renew the policy since the three year validity would now be up.
The poor showing of a relatively small number of FTSE 100 companies is indicative of the intention of institutional investors to go after the high profile cases – WPP, Persimmon, BT. It is no indication of a general breakdown in corporate governance: indeed the improved general voting this year suggests practice is improving.
For more information contact firstname.lastname@example.org
- August 29, 2018
Pay Ratios Disclosure Regulations
Which companies do the pay ratio requirements apply to?
Quoted companies (not AIM companies) with >250 UK employees (average no. over the financial year). This includes all UK employees who have a contract of service with the company, regardless of hours worked, although it is the FTE pay figure that is used.
The draft regulations provide a ‘smoothing provision’ in paragraph 19B which provides for a two-year time lag before a company either drops out of, or is covered again, by the pay ratio disclosure requirement.
What are companies required to do?
Report in tabular form within their annual Directors’ Remuneration Report the ratio of their CEO’s latest Single Total Figure Remuneration to the 25th, 50th and 75th percentile of the company’s UK employees’ FTE remuneration.
Underneath the ratios table, companies must provide some supporting information and an explanation, including:
• the methodology chosen for calculating the ratios;
• the reason(s) for any changes to the ratios compared to the previous year;
• in the case of the median ratio, whether, and if so why, the company believes this ratio is consistent with the company’s wider policies on employee pay, reward and progression.
How many years of pay ratio reporting should be included in the table?
Going forward, the pay ratios table should cover a ten-year reporting period. The disclosure will build in the table incrementally to a ten-year period, with only one set of ratios therefore being disclosed in the first year of disclosure.
The three methods/options for calculating the pay ratio
The three options (A, B or C) essentially boil down to where the company gets their data from; collect it specifically for this purpose, use of gender pay gap data or use of other pre-existing data.
1. Calculate (on a day no earlier than three months before the end of the relevant financial year) the pay and benefits for every UK employee for the relevant financial year;
2. Identify the employees whose pay and benefits places them at the 25th, 50th and 75th percentiles;
3. Compare to the CEO to obtain the ratios.
Option B (use of gender pay gap information)
1. Use the most recent gender pay gap information to identify three UK employees whose remuneration place them at the 25th, 50th and 75th percentiles.
2. Calculate these employees’ pay and benefits for the relevant financial year;
3. Make any necessary adjustments to the pay and benefits identified in step 2 (e.g. if an employee identified using gender pay gap information receives an atypical variable pay in the relevant financial year);
4. Compare to the CEO to obtain the ratios.
Option C (use of other pre-existing pay data)
1. Use pre-existing pay information for UK employees as an alternative to, or in combination with, gender pay gap information.
More detailed information can be found in The Companies (Miscellaneous Reporting) Regulations 2018 – FAQ: https://www.gov.uk/government/publications/corporate-governance-new-reporting-regulations
Or contact email@example.com for further information
- July 16, 2018
The Companies (Miscellaneous Reporting) Regulations 2018
On 11 June the Government put before Parliament a substantial and important statutory instrument, “The Companies (Miscellaneous Reporting) Regulations 2018” (2018 Regulations) which gives effect to a wide range of corporate governance reporting improvements that BEIS has been working on ever since its Corporate Governance Green Paper of 29 November 2016 . These make several amendments to existing disclosure regulations, and are potentially quite onerous. There are exemptions, however, depending on company size. Regulation requirements:
• Production of a full statement in the Strategic Report explaining how Section 172(1) of the 2006 Companies Act has been complied with, i.e. how directors have met their obligation to promote the success of the company with regard for the interests of or impact on various stakeholders, including employees – applies ONLY to large companies (over £36m turnover plus 250 employees and/or assets of £18m) – unquoted companies can publish this on the website).
• Modifications to the director’s report (applies to large companies only)
– A statement summarising how the directors have had regard to the need to foster business relationships with suppliers, customers and others and the effect of that regard
– A comprehensive report on engagement with employees and its effect. Applies to companies with more than 250 employees (no turnover or assets limit).
• A statement of corporate governance arrangements including identifying the corporate governance code the company has chosen to apply in the year, how it has done so and reasons for departure from the code. This applies from 1 January 2019 to all companies (public and private) with more than 2000 employees and/or turnover of £200m and assets of more than £2 Bn. Note that in March the Stock Exchange brought in a broadly similar requirement for all AIM listed companies with no size exemption, to apply from 28 September. Unquoted and AIM companies are expected to use their websites for this purpose.
• Several modifications to the Directors’ Remuneration Reporting Regulations (2013), including
– explanation of discretion on pay awards
– provision of data on the pay ratio of the CEO to the median employee – extended now to upper and lower quartile (for companies with more than 250 employees)
– Impact of share price increase on the historical single figure of remuneration and on future pay as shown in the “scenario charts” for each director.
These changes have been introduced, in part, to reinforce the application of the revised UK Corporate Governance Code, issued by the FRC on 16 July. Contact firstname.lastname@example.org or email@example.com for advice on implementing the new disclosure regulations.
- July 16, 2018
Changes to the UK Corporate Governance Code
The Impact of the FRC’s proposed changes to the UK Code was the theme for the recent Remuneration Dinner held by MM&K – the latest in its series of dinners for CEOs and Non-Executive Directors. To read an overview of the evening click here. The final Code was issued on 16 July. The style of the code has changed substantially. Rather than “comply or explain” the new code has been characterised as “apply and explain” – companies adopting the code are expected to apply the 18 Code principles and then explain how they have applied them. There are still provisions in the Code, but the FRC is anxious that companies avoid a tick box approach to compliance (this is going to put pressure on the proxy agencies if they have to understand a more conceptual approach and provide commentary and judgment in their reports). Contact firstname.lastname@example.org or email@example.com for further information.
- July 16, 2018
Recent changes to the QCA Corporate Governance Code
The Quoted Companies Alliance (QCA), has also been revising its Code and made radical changes (the number of Principles has been reduced from 12 to 10). The Code was issued on 25 April. It is considered to be more flexible than the UK Code and more suitable for smaller companies. The existence of the two codes is particularly relevant to AIM listed companies – under a new AIM rule, AIM companies have to declare on their website, by 28 September, which “recognised” corporate governance code they apply. They have a choice of code. But they also have a separate choice of whether to prepare a remuneration report according to the Directors’ Remuneration Reporting Regulations (which only main market companies are obliged to follow) or to comply with the far more limited AIM rule 19 requirement to provide “details” of directors’ remuneration by applying, for example, the QCA specimen remuneration report in the QCA Remuneration Committee Guide.
For more information regarding the new code and the QCA specimen report, please contact firstname.lastname@example.org
- June 12, 2018
Making Executive bonus plans more effective
On 11 June 2018, MM&K hosted one of its regular dinners for Company Chairman, Non-executive Directors and Chief Executives. The topic for discussion at the dinner was “making executive bonus plans more effective”. A note of the discussion (which was held under the Chatham House Rule) can be accessed here.
In preparation for the dinner, MM&K produced some original research into bonus plan design practice. A copy of the report can be obtained by writing to email@example.com
- June 11, 2018
Reporting the pay difference between Chief Executive and staff
It was announced today by the Department of Business, Energy and Industrial Strategy (BEIS) that legislation would be laid before Parliament which states that larger UK Listed companies (with more than 250 employees) be required to publish annually the pay difference between the Chief Executive and staff, including an explanation of this difference.
To read the full press release by BEIS click here
- June 5, 2018
Malus and LTIP awards
The UK Corporate Governance Code states that long-term incentive plans (LTIPs) must include provisions to enable the company to withhold payments to participants in specified circumstances. It is now common for LTIP Rules to allow the Remuneration Committee to apply these ‘malus’ provisions and also to ‘claw back’ the benefit of awards which have already vested and been paid to the participants. The circumstances may include misconduct of the participant, misstatement of the company’s results and situations which have caused reputational damage to the company.
In a recent case (Daniels v Lloyds Bank Plc), the High Court decided that a new malus clause, added to LTIP Rules, could not apply to awards which had already been granted before the amendment was made. The court also concluded that the Board of Directors could not decide that no shares should be delivered to the participants at all after the Remuneration Committee had determined the level of vesting. This ruling was based on the actual circumstances and may not be applicable to other plans. However, companies will need to ensure that malus and clawback provisions are carefully worded and that proper processes are used if they are ever applied.
- June 1, 2018
Share plan annual returns deadline
Annual share plan returns for the tax year ended 5 April 2018 must be submitted online to HMRC no later than 6 July 2018. Returns must be made for the tax-advantaged share plans – SIP, SAYE, CSOP and EMI – and also for unapproved share plans. Items to be reported include grants of share options and conditional share awards, acquisition of shares by employees and any other taxable events. In addition, if any amendments have been made during the tax year to key features of SIP, SAYE or CSOP plans, the company must confirm that the plans continue to comply with the relevant legislation.
Please note that, even if there are no reportable events, a nil return must still be submitted. HMRC has reported that, for the 2016-17 tax year, more than 7,000 companies had to pay penalties for missing the deadline.
- May 30, 2018
SAYE permitted missed contributions extended from six to 12
The regulations for Save-As-You-Earn/Sharesave share option schemes allow employees to miss up to six monthly contributions. These contributions can be made up in later months and the bonus date, when options become exercisable, is delayed accordingly. From 1 September 2018, this maximum ‘savings holiday’ is to be extended to 12 monthly contributions. The new provision will apply to all SAYE option holders, not just those who may be on special leave; but an amendment to the scheme Rules will be required in some cases.