The Association of British Insurers have published the 2012 update to their Principles of Remuneration, with a number of key changes focusing on simpler remuneration structures while offering flexibility for special cases. Two new paragraphs have been inserted in the Principles, while content from the former Appendix is moved to an expanded Guidance section as part of a welcome rearrangement and better focused document.
The Principles now state that they do not seek to prescribe or recommend any particular remuneration structure, while emphasising a desire for simple and understandable remuneration structures. The Remuneration Committee should select a remuneration structure which is appropriate for the business and in line with the long-term strategy.
Additions to Guidance
- “Shareholders prefer simple remuneration structures; simplicity can be improved by limiting variable remuneration to an annual bonus and one long term incentive scheme.”
- The assertion that “Matching schemes may add unnecessary complexity” may signal the end of these sort of schemes.
- Re-wording of annual bonus target disclosures seem to offer companies more discretion in determining whether or not it is appropriate to disclose (retrospectively) the actual targets for the annual bonus measures chosen. However there is additional guidance seeking disclosure as to the extent that the targets were met.
- “Discretion should be retained to ensure that a payment that is inappropriate in all the company‟s circumstances is not made. Companies should disclose the range of discretion which can be applied to bonus awards”.
- As part of a shake-up for the LTIP performance condition guidance, one key removal is a sentence which previously stated: “Total Shareholder Return (TSR) relative to a relevant index or peer group is one of a number of generally acceptable performance criteria.” A focus on measures appropriate to the business replaces this and there is a recognition of measures relating to ESG criteria, although links to strategy should again be clearly explained (see below).
- “The performance period should be clearly linked to the timing of the implementation of the strategy of the business, which should be no less than three years and shareholders would generally prefer longer. Committees should consider the use of additional holding periods”.
“The widely differing nature of business models and industry characteristics means that the appropriate performance measures and conditions for different companies may vary significantly. Where operational measurements are used, they would generally be expected:
o To include, subject to business strategy, one or more measures relating to overall business volume or growth
o To include one or more measures relating to business efficiency or profitability
o To avoid the risk of providing an implicit incentive to take undue operational or financial risks or, in particular, to adopt an unduly risky capital structure.”
“Remuneration committees may consider other criteria, for example relating to environmental, social and governance (ESG) objectives, or to particular operational objectives, to be appropriate. In each case, the link to strategy and method of performance measurement should be clearly explained.”
“Where appropriate, Remuneration Committees should take account of the ABI Guidelines on Responsible Investment Disclosures.”
- There is a watering down of some existing guidance, notable on pre-grant performance periods where now “Measuring performance achieved prior to the point of grant is generally not favoured. If pre-grant performance measurement is considered appropriate, it should be carefully justified, and accompanied with genuinely long holding periods and significant shareholding requirements.
- A clarifying comment regarding threshold vesting (“reflecting expected performance”) is welcome.
Recruitment & Other One-off Awards
- “When recruiting Executive Directors, companies should pay no more than is necessary and should fully justify payments to shareholders. Compensating executives for the forfeiture of awards from a previous employer should generally be on a comparable basis, taking account of performance achieved or likely to be achieved, the proportion of performance period remaining and the form of the award”. This addresses a key concern for the first time and shareholders will no doubt be closely monitoring disclosures relating to new hires.
- A second “watering down” is on the issue of one-off awards – the sentence “Special or one-off awards are not generally favoured” has been removed. Now any such awards should be carefully justified.
- Shares should only count towards the executive‟s shareholding guideline if they are completely unfettered. The use of shareholdings in hedging arrangements or as collateral for loans should be fully disclosed. Shares which are subject to future performance, holding periods, claw-back or shareholding guidelines should not be hedged or used as collateral.
- Any differences in pension contribution rates for executives and the general workforce should be disclosed and justified to shareholders.
Overall, the changes improve the guidance significantly and should help encourage Remuneration Committees to take decisions (particularly around performance conditions) that are weighted more strongly on the needs of the business and less on the need to use TSR because “that’s what the guidelines say”.