The guide is rewritten and includes helpful guidance, but continues to prioritise the good instincts of experienced committee members over a generic box ticking approach. The guide will be a useful tool to reflect on the role and practice of your remuneration committee. We pick up some of the key points for share incentives arrangements below.
Whose remuneration does the remuneration committee consider?
The new guidance emphasises the need to consider the senior team members as well as executive directors when looking at pay levels, share schemes and alignment with risk parameters. There should be clear terms of reference which are updated at least once a year, so this is a prompt to consider an update.
Communication with shareholders
The revised guide includes as a key responsibility of the remuneration committee, the responsibility of communication with shareholders in the annual report on remuneration issues, including giving sufficient information to allow them to decide whether or not to support remuneration policy.
The revised guide states the UK Corporate Governance Code recommendation that the remuneration committee chair should previously have served on the committee for at least 12 months.
The guide picks up a number of administrative points, including:
- There should be minutes of each meeting which should record decisions about each individual director's remuneration and overarching decisions,
- If the usual minute taker is conflicted, because their remuneration is under discussion, an HR team member may take minutes.
- Comprehensive information should be circulated in advance of meetings.
- Privacy issues should be considered when circulating information, which will usually include sensitive information.
- KPIs for LTIPs should be clearly recorded and communicated to participants in a timely manner.
Remuneration Policy should be reviewed in detail every three years. The guide sets out key principles against which the remuneration committee can test their policy. Points to highlight include:
- A reference to requiring vested shares to be held for a period of, usually, two years as a way of maintaining a long-term focus. The requirement for post vesting retention, net of shares sold to pay tax, is widely adopted in the main market.
- Developing share ownership guidelines requiring executives to build and maintain a holding of shares by reference to their basic salary.
- Requiring shares to be held for a period following the cessation of employment.
- The inclusion of a reference to introducing or refreshing all-employee share plans.
Targets should be clearly disclosed in the remuneration report. For long-term incentives, targets should be disclosed prospectively at the start of the vesting period and the again, with commentary, on vesting.
The guidance states that malus and clawback arrangements are expected to allow lapse/clawback when there is: a material misstatement of results, gross misconduct, bringing the company into disrepute, corporate failure, fraud or performance conditions having been based on errors.
Annual bonus deferral
Consideration should be given as to whether there should be a partial deferral of bonuses into shares.
The guide sets out considerations regarding the design of LTIPs. In particular, the guide suggests considering retaining the ability to reduce the number of shares on vesting where there is perceived to be a windfall gain. It also advocates including a requirements for vested shares to be held for a further period following the end of the performance period.
The guide includes helpful information on the statutory reporting requirements and in some cases suggests levelling up in terms of the disclosure made to accord with the main market requirements.
Shareholders communications regarding new incentive plans
The guide suggests that key shareholders should be written to at a fairly early stage. In the case of a major change to remuneration policy it is suggested that a six month period is allowed for consultation.
The guide is available for purchase at the Quoted Companies Alliance website www.theqca.com
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