Download - Director Remuneration Policy - MM&K · Director Remuneration Policy Looking back but moving forward Jeremy Edwards and Kathy Hood Baker & McKenzie LLP is a member firm of Baker &

Director Remuneration PolicyLooking back but moving forward

Jeremy Edwards and Kathy Hood

Baker & McKenzie LLP is a member firm of Baker & McKenzie International, a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organisations, reference to a "partner" means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an "office" means an office of any such law firm.© 2014 Baker & McKenzie LLP

Agenda• Policy recap and key issues to consider• Observations and trends• Observations and trends• Initial reactions to companies’ policies• Evolving practice• Evolving practice • Developments• Questions for tables to considerQuestions for tables to consider

© 2014 Baker & McKenzie LLP 2

Policy report | recapPolicy report | recap

Policy overview | recap

Companies have now prepared their first remuneration policies under the new regime

Forward-looking policy; disclose details of all aspects of the company’s policy on remuneration and loss of office payments

What is it?Covers current, previous and future directors (including non-executive directors)

What is it?

Subject to a binding shareholder vote every 3 years (or earlier if propose to change the policy or if the annual remuneration report is voted against)

Prescriptive regulatory requirements

© 2014 Baker & McKenzie LLPDM Ref: 6027466

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Policy overview | recap

Binding nature of the policy

• Cannot make changes to the policy without shareholder approval, though can include some scope for discretion within the policy

• Can make payments to directors only if they are within the scope of the policy, unless p y y y p p y,the payment is specifically approved by shareholders

• If a payment is made which is outside the scope of the policy: • Payment will be void and held on trust by the director for the benefit of the companyPayment will be void and held on trust by the director for the benefit of the company• Directors who authorised the payment will be jointly and severally liable for any loss

• Exception for payments made before (and not renewed/modified on or after) 27 June 20122012

GC 100 guidance: Aim for policy to remain in place for 3 years


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Policy requirements | recap

Policy Report to include:

Future policy table, setting out for each

element of pay:

Approach to recruitment

remunerationSummary of

service contract bli ti

Scenario chart • Purpose & link to

strategy• Operation• Max potential value*

Loss of office payment policy

obligations showing amount receivable by

element for each executive director at Statements of

• Malus & clawback provisions

• Performance assessment framework

Notice period policy

minimum, on-target and max levels

consideration of employees’ pay and

conditions and shareholders’ views

* Although no prescribed limits on pay, required to set the maximum amount that may be paid in respect of each element of pay (including salary, benefits, incentives

and pensions) – expressed in monetary terms or otherwise


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and pensions) expressed in monetary terms or otherwiseThe company will then be bound by this

Key issues to consider

• Voting on the policy again this year?• When might you need to do this?

• Consider how the policy is working in practice• Did you get it right first time?

Need/want to change the policy

If advisory vote against annual report

y g g• Has it been sufficiently flexible so far? Gaps identified

/ developments not originally envisaged? • Areas of weak compliance / not best practice?p p

• Consider shareholders’ reaction to current policy• Aspects that shareholders took issue with?

• Investors recommend disclosing the policy table every• Investors recommend disclosing the policy table every year even if the policy report is not being voted on


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Observations and trendsObservations and trends

FTSE 100 survey

• Annual FTSE 100 survey, since 2008/2009 – 129companies this year

• Seen a range of approaches taken to meeting the regulations• Clarity of reports and level of detail of

di l i ddisclosures varied• Major areas of challenge for companies:

• Flexibility and discretion – esp. recruitment and exit policies• Disclosure of performance measures and targets• Link between pay and strategy

• Questions re whether certain regulations met – depends on strictness of interpretationQuestions re whether certain regulations met depends on strictness of interpretation• Presentation of some disclosures – can initially give one impression, but the

detail may tell another story• Lack of clarity in some cases – a result of conflict between need for flexibility and


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Lack of clarity in some cases a result of conflict between need for flexibility and need for transparency / to meet prescriptive regulations

Observations and trendsObservations and trends

Policy start date• Vast majority went for date of the AGM (over 90%)

Policy start date

Policy term• Approx;

• 50% did not mention policy term• 40% expressed at least an intention to last for 3 years• 10% warned of anticipated changes within 3 years10% warned of anticipated changes within 3 years

• Salary – Less than 10% set a monetary maximum (and some of those with

Maximum limitsSalary Less than 10% set a monetary maximum (and some of those with discretion to go higher)

• Benefits• Variable pay, including for new recruits


Observations and trendsObservations and trendsHonouring previous commitments

• Approx 60% included a statement

g p

Discretions

• Incorporating discretions – approx 25% included a standalone paragraph regarding discretions

• Discretion to make minor amendments – approx 15% included a statement to this effectE di ti ll i it ti d di ti

Discretions

• Emergency discretion – very small minority mentioned emergency discretion

Performance conditions

• Description of performance framework to include measures and weightings - commercial sensitivity opt out heavily used, particularly in relation to the annual bonus – e.g. approx:• LTIP – 55% clear weightings; 20% indication only; 20% none (5% N/A)• Bonus – 25% clear weightings; 40% indication only; 30% none (5% N/A)


Observations and trendsObservations and trendsRecruitment policy

• Key area of shareholder concern• Most common concerns where policy allows payments to be made outside the

policy / where no overall limit / where ability to grant sign on payments not related b

p y

to buy outs • Particular lack of clarity / transparency in some cases

Exit policy

• Significant variances in level of detail, e.g. considerations taken into account when exercising discretions / different scenarios

• Broadly principles-based approach

Exit policy

y p p pp

Shareholders’ views


General

• Some areas of dubious compliance with regulations (and in some cases, non-compliance)

• Investor concerns• Practice still evolving

• Benefit of past experience (and other reports) p p ( p )this time round

• Greater administrative burden – volume of disclosures + some uncertainty as to how to report and level of detail required

• Need for careful drafting and continuous monitoring• Areas to watch: recruitment and exit policies


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Initial reactionsInitial reactions

Shareholder voting

• B&M FTSE 100 survey• AGM voting results so far – approx:

• 83% of the companies surveyed received a 90%+ vote in favour of their policy• 10% received between 80% and 90% in favour of their policy• 7% received between 50% and 80% in favour of their policy7% received between 50% and 80% in favour of their policy

• Not sweeping use of new voting powers – shareholders have not voted policies down in large numbershave not voted policies down in large numbers• But increased engagement and shareholder activism• Shareholder activists, e.g. PIRC and Fidelity

• NB. dissenting votes


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Shareholder concerns

• Common concerns raised by shareholders and highlighted by IVIS and ISS:• Recruitment policy scope / limits• Levels of fixed pay, pensions and total pay• Lack of limits and potential increases re: fixed pay

• General discretion of remuneration committeeGeneral discretion of remuneration committee to make ‘exceptional’ awards

• Adequacy of performance conditions and vesting at threshold performanceg p

• Loss of office payments which include bonuses

• General lack of disclosure / clarityGeneral lack of disclosure / clarity

• Publication of clarifications


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• IMA has also highlighted a number of key areas of concern in its recent letter to remuneration committees (20 October 2014)

Criticism of reports

• Complaint to Financial Reporting Council (FRC)• Government criticism• Institutional shareholders, e.g. NAPF:

• “Quantity has overshadowed quality” in some cases• Reports “too often read as compliance documents as opposed to communicationReports too often read as compliance documents as opposed to communication

tools”• More understanding of the “what” and the “how” regarding pay – but remains

difficult in many cases to grasp the “why”y g p y• Is the regime achieving its objectives?

• NAPF: Hope will be a shift away from minutiae towards more holistic conversations about remuneration and corporate strategyabout remuneration and corporate strategy

• Dangers of the new regime

• IMA has also highlighted problems experienced with the shareholder engagement


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g g p p g gprocess in its recent letter to remuneration committees

Evolving practiceEvolving practice

Changes to remuneration structures

• Many new LTIPs this year• Moving to just one LTIP and an annual bonus plan

• NB. institutional investor guidance• Post-vest share holding periods• Move towards the 5 year modelMove towards the 5 year model

• Clear ultimatum from Fidelity Worldwide Investments• Shareholding guidelines


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Developments

• Expecting update paper to GC100 guidance in Q4 2014• Investment Management Association (IMA) principles of remuneration for 2014

(formerly the ABI Principles of Remuneration); covering letter to remuneration committee chairmen (20 October 2014)

• Amended Corporate Governance Code (applies to financial years beginning on or after 1 O t b 2014)1 October 2014)• New shareholder engagement requirement• Clawback and malus• Remuneration Principles and Schedule A

• High Pay Centre manifesto: How To Make Top Pay Fairer (14 July 2014)

• EU proposals


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Questions for tables to consider

1. What did your company find the most challenging when drafting the policy?p y

2. What areas of the policy did your company engage with shareholders on before the policy was voted on? Were any issues/concerns raised by shareholders?by shareholders?

3. How has your company’s policy worked in practice so far? Will your company be updating its policy this year, or do you think that the policy remains sufficiently flexible for the coming year?

4. What areas of the policy will your company focus on or change this year when your company comes to review it?year, when your company comes to review it?


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Any questions?Any questions?

This presentation was prepared for general information purposes for clients and friends of Baker & McKenzie LLP and should not be considered or relied on as legal advice or an opinion on specific facts. This presentation is not intended to create, and receipt of this presentation does not constitute, a lawyer-client relationship.

Baker & McKenzie LLP is a member firm of Baker & McKenzie International, a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organisations, reference to a "partner" means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an "office" means an office of any such law firm.© 2013 Baker & McKenzie LLP