Remuneration of administrators, directors and managers

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2015 CARL CONFERENCEBrussels 17-19 DECEMBER 2015

SHARING VISION, ACHIEVING SUCCESS

BUSINESS DAYMARCALLIANCE & MAZARS TAX JOINING FORCES

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REMUNERATION OF ADMINISTRATORS, DIRECTORS & MANAGERS


TABLE OF CONTENTS

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1. INTRODUCTION

2. EMPLOYER, EMPLOYEE AND EMPLOYMENT3. KEY EMPLOYMENT TYPES

4. DIRECTOR PROFILE5. ADMINISTRATORS

6. HOW BY WHOM IS REMUNERATION DETERMINED7. REMUNERATION

8. FINANCIAL SERVICES9. TYPICAL REMUNERATION MODEL

9. EMPLOYER, EMPLOYEE AND EMPLOYMENT

10.GOVERNANACE11.EMPLOYEMENT LAW

12.TAX CONSIDERATIONS13.SPECIAL SCENARIOS

INTRODUCTION

This presentation is seen from a UK perspective. Our challenge is to understand there are several points which do not correspond to labour law reality in a

number of locations.

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INTRODUCTION

Almost everyone whether they be employee, director, worker, self-employed contractor or otherwise receives an income for the work they undertake.

In most jurisdictions, government seeks to tax that income.

The amount of that tax and who pays it is of great interest to employers, employees, directors and shareholders.

We have agreed that post conference we will to look to produce a comparative dashboard that sets out how things work in different jurisdictions and be designed to support marketing initiatives.

In this presentation we aim to introduce some ideas around remuneration for individuals in executive positions such as administrators, directors and managers.Date6 Titre de la présentation

DEFINITIONS


KEY EMPLOYMENT TYPES

Employee An employee is someone who works under a contract of employment.Employment rights – e.g. sick pay, maternity pay, notice periods, unfair dismissal, redundancy pay.

They have a contract or other arrangement to do work or services personally for a reward.Their reward is for money or a benefit in kind – including the promise of a contract or future work.

They have a limited right to send someone else to do the work. They have to turn up for work even if they don’t want to. The employer has to have work for them to do as long as the contract or arrangement lasts.They are not doing the work as part of their own limited company in an arrangement where the ‘employer’ is actually a customer to the client.

Self-employed and contractor A person is self-employed if they run their business for themselves and take responsibility for its success or failure.Self employed workers are not paid through a payroll and do not have employment rights and responsibilities of employees.


DIRECTOR PROFILE

Company directors run limited companies on behalf of shareholders.Directors have different rights and responsibilities from employees, and may be classed as office holders for tax and social security purposes.If a person does other work that’s not related to being a director, they may have an employment contract and get employment rights.

Types of directors:

Directors appointed in accordance with the company’s Articles of Association. Managing Director/Chief Executive OfficersNon-executive directors – no legal distinction between directors and non-executive directors , non execs are not normally involved in the day to day running of the business. Shadow directors, may provide instructions and directions to the board.De facto directors – effectively perform the role of a director but have not been officially appointed.


OFFICE HOLDER

A person who has been appointed to a position by a company or organisation but does not have a contract or receive regular payment may be an office holder. This includes:

Statutory appointments.

Appointments under the internal constitution of an organisation.

Appointments under a trust deed e.g. trustees.

Ecclesiastical appointments.

They do not get a salary or any other form of regular payment for their services.

They may receive fees/payments for duties undertaken. Date10 Titre de la présentation

ADMINISTRATORS

The Administrators of a Public Limited Company cannot maintain an employment relationship with the company.

Administrators during an insolvency process are appointed by the court and although they work with the board, they do not have an employment relationship with the company. They will charge time costs for their services.

The relation with company of a senior manager whose purpose consists of the development of administration and management activities for the company and labour relation of the Administrator thereafter, is exclusively of a commercial nature, and not of a labour nature, because the senior manager’s functions are subsumed into the functions of the Administrator.


HOW AND BY WHOM IS REMUNERATION DETERMINED?

Corporate governance framework – organisational culture issues.

Regulatory framework – industry practices – e.g. financial services.

Talent management – talent acquisition & retention, incentive and performance behaviours – aligned to central and local business strategies.

Remuneration committee objectives – aligned with central and local business strategies.


HOW AND BY WHOM IS REMUNERATION DETERMINED?

Combination of external benchmarking + internal performance metrics

Plan design

Pre-tax profit impact

Return on equity

Employment law

Corporate law

Tax law

Software to generate the numbers

Disclosure and reporting


REMUNERATION

What comprises remuneration – salary and defined benefits?

Tax implications of benefits v salary; e.g. in the UK advantages of pension contributions and advantages/disadvantages of salary sacrifice mechanisms.

Motivational arrangements for directors and managers in particular.

Share schemes/LTIs and bonus arrangements.


TYPICAL REMUNERATION MODEL

Base pay,

Benefits-in-kind,

Annual Bonus Plans,

Deferred Annual Bonus Plans,

Pension Schemes,

Short-term incentives,

Long –term incentives.

Most directors will pay themselves in the form of salary. But sometimes they may be paid by dividend payments,

which can only be paid to shareholders and then only if there distributable profits.

It s not uncommon for directors to be paid a round sum by the company, and then decide upon its tax treatment

at the end of the year e.g. whether it will be treated as remuneration, or a dividend.

Directors may receive their remuneration in the form of loans from the company that has to be repaid.


FINANCIAL SERVICES

As a result of regulatory pressure on Executive Remuneration in Financial Services, European banks are increasing of base salaries, particularly for their executive staff, whereas the North American banks are not.

Key issue is around deferral arrangements vs. LTIPs, deferral is not popular in this sector, especially at 60 – 90% for 5 years for executives , compared to LTIPs that tend to only be unpopular when underwater.

How to achieve the right mix in terms of balancing new regulations and the need to provide incentive arrangements is the emerging challenge for employers alongside the impact of potential clawback of remuneration.


UBS TO CHANGE WAY IT PAYS SENIOR MANAGERS

ZURICH, Switzerland (AP) -- UBS AG (UBS) said Monday that starting next year it will stop making bonus payments to its chairman and that other top executives will be penalized if the bank performs badly to discourage irresponsible risk-taking.

Switzerland's largest bank has been under pressure to change its compensation model after it was revealed that senior officials were paid bonuses worth millions of francs annually even though their management drove UBS to seek a $60 billion government bailout last month.

UBS chairman Peter Kurer will receive a fixed salary from 2009, the bank said.

Kurer, the most powerful figure at UBS, has already said he will forgo any bonus for 2007 and 2008 until the bank has recovered from a disastrous year that saw it lose 45 billion francs ($40 billion) due to bad investments.

The bank will also introduce what it calls a "bonus-malus" system for its other 12 board members that will see their bonus held back for a certain period to discourage risky short-term investments.

UBS said it would apply this system to other senior managers in charge of high-risk parts of its business.


GOVERNANCE


REMUNERATION GOVERNANCE

Corporate governance – remuneration policy advice, annual remuneration reporting

Regulatory framework – financial services issues, clawback for misconduct

Talent management

Remuneration committee objectives


EMPLOYMENT LAW CONSIDERATIONS


EMPLOYMENT LAW

Corporate governance – remuneration policy advice, annual remuneration reporting.

Regulatory framework – financial services issues, clawback for misconduct.

Individual contracts

Statutory remuneration rights e.g. national minimum wage, guaranteed pay on lay off, statutory redundancy pay, statutory maternity pay – right to non-cash benefits during leave


TAX CONSIDERATIONS


TAX PLANNING

Planning opportunities around the implications for base pay and benefits-in-kind, also tax treatment of clawbacks.

Planning for short –term and long-term incentive arrangements, particularly equity incentive/stock plans.


UK EXAMPLES


BONUS CLAWBACK

Case: Revenue And Customs v Martin (22 September 2014)

Liability of employee under his employment contract to refund a proportion of a taxable signing on cash bonus when the employee gave notice to resign prior to the end of the period for which the employee had committed to remain an employee

Introduced the concept of “negative earnings” for the purposes of income tax

What about NICs?

What about Equity arrangements?


SALARY SACRIFICE

A tax and NIC effective way of rewarding employees

Most popular benefit is pension contributions by way of a salary or bonus sacrifice

HMRC are currently “monitoring the usage…”

With effect from April 2016, the pensions annual allowance will be subject to a tapered reduction for individuals who have an adjusted income over £150,000. Any salary sacrifice set up on or after 9 July 2015 will be included in the adjusted income calculation. Impact on high earners and bonus sacrifice

Salary sacrifice mechanisms associated with non-cash benefits during statutory maternity leave


RANGERS EBT – OUR ANALYSIS

4 November 2015 The Court of Session found in favour of HMRC (overturning two earlier rulings favouring the taxpayers.) We await news of any appeal to Supreme Court. Meanwhile points to note:

Court admitted new grounds of appeal and found for HMRC on this basis

“The critical feature of employments or earnings is that they represent consideration for services provided under a contract of employment, and such consideration is ultimately provided by the employer.” (“It is immaterial that there was no contractual entitlement to the sums paid”.)

Introduces the notion of “diverted earnings” – could HMRC seek to attack salary sacrifice arrangements on this basis?

PAYE due as soon as funds contributed to Principle Trust. What happened after was irrelevant. (What now for discretionary trusts? Those who have suffered BIK tax on loans may be able to reclaim, also employer class 1A NIC.)

Settlements with HMRC should have included IHT. Still can settle but not on same deal terms


AWARDS MADE AS TERMINATION PAYMENTS

HMRC has issued a consultation document

Aim of the consultation is to seek views on how the tax and NIC treatment of termination payments can be made simpler and fairer. It includes a proposal to replace the current system with a smaller initial exemption, which would depend upon length of service and apply to any termination payment

In particular the consultation asks about: removing the distinction between contractual and non-contractual termination payments and whether this will make it easier for employers

and employees to understand

the design of the new exemption from income tax and NIC

whether the income tax and NIC treatment of termination payments should be aligned

which of the existing exemptions which remove the liability to income tax should be retained e.g. disability , foreign service relief

whether any new exemptions should be introduced

“Failure of health” retirement

Current concessions around “disability”

“foreign service relief” on termination

“EFRBS” on termination


SPECIAL SCENARIOS


SPECIAL SCENARIOS

Exit planning – Termination of employment, severance pay, payments in lieu, pension structures, benefit arrangements.

International situations – Resident directors of foreign companies, non-resident directors.


EXIT PLANNING

Using remuneration options to secure a smooth exit when parting company with employees :

Severance pay arrangements and related tax advantages

Opportunities to use payments in lieu of notice depending on contract terms

Cycling payments through pension structures subject to age

Maintaining benefits e.g. health insurance as a sweetener

Settlement agreements – advantages of use irrespective of any statutory requirement.

Public sector exit payments cap proposals and implications for affected private sector organisations.

Benefits of securing enforceable post –termination covenants as part of the overall settlement package.


INTERNATIONAL SITUATIONS

Non-resident directors – Income Tax

Fees paid in respect of a UK statutory directorship to a director who is non-resident are assessable to UK taxation

if the director performs any directorship duties in the UK.

However, if the non-resident statutory director of a UK company performs no directorship duties at the associated

fees will not be assessable to UK income tax.

Non-resident directors – Social Security

UK visits by a non- UK resident director of a British company needs to consider whether they considered to be

present for UK NIC purposes.

The factors to be weighed are the extent and purpose of the visits, the place at which the duties are performed,

and the place they have their home.


INTERNATIONAL REMUNERATION

An organisation can adopt one of three main approaches:

1. To set reward centrally

2. To have a central reward approach that is adapted for each subsidiary

3. To allow each subsidiary to set its own approach to reward


INTERNATIONAL REMUNERATION

Reward philosophy:

Values and beliefs that an organisation associates with remuneration and reward in general. Whole of organisation or adapted to fit individual subsidiaries and local culture.

Remuneration strategy:

Driven by the business strategy Likely some central strategy but adapted to the business strategy of each subsidiary Part of wider reward policy Documented and communicated so employees can understand how they will be rewarded


REMUNERATION PLANNING – KEY CONSIDERATIONS


INTERNATIONAL REMUNERATION PLANNING – KEY CONSIDERATIONS



REMUNERATION OF ADMINISTRATORS, DIRECTORS & MANAGERS

Jonathan SimmonsCripps [email protected]+44 (0)1732 224 012

Steve [email protected]+44 (0)20 7063 4526

Francisco Espregueira Mendes Telles [email protected]+351 934 455 555

Remuneration of administrators, directors and managers

Law

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