Out-Law News 3 min. read
16 Nov 2015, 11:47 am
The IA, which represents the interests of the asset management industry, has made few substantial changes to the document this year so as not to pre-empt the work of its recently-established 'Executive Remuneration Working Group' which is considering ways to simplify executive pay. However, share plans and incentives expert Graeme Standen of Pinsent Masons, the law firm behind Out-Law.com, said that a letter to remuneration committee chairs accompanying the update seemed "more directive and detailed" than in previous years.
"The threat of 'red top' ratings for not complying with the letter's target expectations on bonus disclosure for year ends from 1 December, which is less than a month away, is especially striking," he said. "The IA's concerns are hardly new so its position is not unfair, but the comments in the letter are demanding and clear, especially as it states that IA members asked for this change."
"The letter also points out that IA members' client beneficiaries want to know why remuneration packages have been supported, which is not something that it has said before. This adds weight to the letter - and, it having been said, the IA must perhaps be seen to deliver and may include more beneficiary feedback in future," he said.
IVIS, which is the IA's research arm, monitors all companies in the FTSE All-Share Index and the top 50 companies in the FTSE Fledgling Index for compliance with corporate governance best practice. Although it does not provide voting recommendations for the institutional investors that make up the IA's membership, it uses 'red' and 'amber' top colour codes on its analysis to highlight breaches of best practice or areas of concern.
The IA is the trade body which represents the interests of the asset management industry, including both retail and institutional assets. Its remuneration principles (17-page / 531KB PDF) are updated annually to take account of any trends and events emerging from the previous corporate AGM season, and set out the views of the IA's members on executive pay. The principles have become particularly influential following the introduction of the Directors' Remuneration Reporting Regulations in 2013, and the binding shareholder vote on executive pay.
Only two substantial changes have been made to the principles this year, one of which reflects the increased consensus among IA members that long-term incentive awards should be made with a performance and holding period of at least five years in total. However much of the accompanying letter, which is usually used by the IA director of corporate governance and engagement (DCG) to highlight topical issues of concern to the body's members in relation to executive pay, is given over to concerns about insufficiently detailed bonus disclosure, the other point addressed by a change in the principles themselves.
"The Remuneration Regulations allow companies not to disclose targets if they are 'commercially sensitive'; however, any company which considers their targets to be commercially sensitive must explain to shareholders the circumstances that justify the use of this approach and indicate when targets will be disclosed in future," IA DCG Andrew Ninian said in his letter.
"Members now expect that targets will either be disclosed retrospectively in full at the end of the year, or that there is a commitment to disclose such targets in full at a specified time in the future. Where companies do not disclose any targets or do not commit to full future disclosure, members have asked IVIS to Red Top those companies as they believe that there is insufficient information to make an informed voting decision. Where relative achievement is disclosed with no commitment to disclose the actual target ranges, an Amber Top will be given," he said.
Research published by PwC earlier this week found that the link between bonuses paid and company performance had improved significantly as a result of the new reporting and governance regimes. The correlation was more than twice as strong at those companies that complied with the requirements in full than at those that opted out, according to PwC's formula.
Share plans and incentives expert Suzannah Crookes of Pinsent Masons said that the letter also highlighted continuing investor concerns about high salaries and increases above the rate of inflation.
"Salary restraint has more importance over time than may be immediately apparent, as bonuses and long-term incentive awards are usually capped by reference to a multiple of the salary at the time of the award. Overall, the letter raises at least a point on all five of the key issues relevant to curbing 'excessive' remuneration, whether such 'excess' relates to the overall position or to specific 'rewards for failure',eg, arguably generous payments to a departing executive director," she said.
"There is a particular emphasis on regulating termination packages - the letter calls for justification of deemed 'good leaver' status, a 'firm approach' from remuneration committees, an end to asymmetric notice periods and withholding of payments in lieu of notice (PILONs) etc if and while relevant investigations or proceedings are underway. The comments on notice periods are particularly interesting: the letter from the IA does state that a majority of members remain in favour of notice periods of up to 12 months, so it appears that a tougher approach to severance pay rather than shorter notice periods is the preferred approach for IA members," she said.