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ABI executive remuneration guidance ties pay to performance, say experts

Listed companies should favour simple executive pay structures, with one annual bonus and one long term incentive to reward performance, the Association of British Insurers (ABI) has said.28 Nov 2012

The trade body has published updated Principles of Executive Remuneration in its role as a representative of insurers, many of which are "significant" institutional investors. The document calls for a clear link between the company's remuneration structure, performance measures and the delivery of the company's long-term strategy, with the performance period for long-term incentives aligned with the implementation of that strategy.

Companies should also "clearly demonstrate" the link between pay and performance, the guidance said. They should provide "clear and concise" disclosures to shareholders, to assist them in making informed voting decisions.

Judith Greaves, an expert in share plans with Pinsent Masons, the law firm behind, said that the revised guidance highlighted several points likely to be on companies' agendas for executive remuneration. These included clawback and 'malus' provisions, allowing companies to claim back pay following poor performance, the way in which discretions are operated and the relationship between pay, performance conditions, key performance indicators and business strategy.

Share plans expert Matthew Findley of Pinsent Masons added that guidance called for executive remuneration to be "very clearly tied to the company's strategy and performance outcomes". This was "unsurprisingly" consistent with previously stated desires of investors, as well as the Government's own proposals for the regulation of executive remuneration, he said.

Changes to the structure of companies' remuneration reports, requiring them to set out actual payments made to directors over the course of the year as a single figure, are anticipated to take effect from October next year. The new reports will also include information on how well the company performed that year and what impact, if any, its performance had on pay. Changes in the law which will introduce a binding shareholder vote on companies' executive remuneration policies are due to take effect at the same time.

The ABI's traditional guidance on executive remuneration was renamed 'Principles of Remuneration' last year, when it was last updated. The body's Institutional Voting Information Service (IVIS) may issue a 'red top' or 'amber top' alert to institutional investors about shareholder resolutions in relation to executive pay if there are concerns that a listed company may have significantly breached its guidance.

In a statement accompanying the updated document, the ABI said that there was "no benefit" to making major changes at a time of regulatory uncertainty. However, the rules had been "updated to reflect current investor views" in a number of areas.

"Whilst there has not been a major change to the guidance itself, there are a number of areas which have come into sharper focus and which may indicate an expectation from investors of change in the longer term," Lynette Jacobs, a share plans expert with Pinsent Masons, said.

The ABI said that it did not seek to "prescribe or recommend any particular type of scheme" in its guidance, instead stating that companies' remuneration companies should set rules "based on the company's circumstances and strategy" following the general principles outlined in the document. Performance conditions set by the committee should be the most appropriate to "incentivise the management to achieve the corporate strategy", it said.

"ABI members believe firmly that it is the role of the Board and the Remuneration Committee to set remuneration policy and make decisions on what individuals should be paid," the ABI said. "Shareholders expect the Remuneration Committee to protect and promote their interests in setting executive remuneration. Shareholders will scrutinise but not micro-manage this important part of the non-executive directors' responsibilities."

The document also includes initial guidance on the ABI's approach to disclosures under the proposed new reporting regime, ahead of final details on the requirements. A consultation on the changes from the Department of Business, Innovation and Skills (BIS) indicated that companies will be required to include a 'policy table' on the company's position, to include basic salaries, bonuses, long term incentives, pensions information and recruitment pay policies. The ABI said that companies would need to strike a balance between retaining sufficient flexibility in their arrangements, and establishing sufficient boundaries.