Home > Compensation > The UK Investment Association`s Compensation Principles (II)

The UK Investment Association`s Compensation Principles (II)

In our previous post, we described the Principles, the Remuneration Policies and part of the Remuneration structures recommended by the UK Investment Association i its recently published “Principles of Remuneration”, (1).

We will today refer to their recommendations regarding Variable Pay. First, they assert shareholders prefer simplicity; second, they state that variable pay must be linked to corporate strategy and long-term value creation; consequently, any metric which firms eventually use to measure performance, (financial or not, as ESG targets), need to be clearly connected to the firm´s performance characteristics.

a) Annual Bonus.

a. Bonuses must be linked to performance, through KPIs or metrics (financial or not) reported in the Strategic Report. Measures and targets need to be disclosed, (at least in certain levels that do not jeopardize the firm´s commercial activities).
b. Maximum participation levels and eventual increases must be disclosed.
c. The Remuneration Report must offer ex-post information on targets attainment.
d. Partial Deferral through shares is recommended as it enhances alignment with shareholders.
e. Discretion should be used to avoid inappropriate payments.

 

b) Long-term Incentives.

a. General. LTIs reward outstanding strategy implementation and value creation through a period similar to the one needed for this implementation, usually not shorter than five years. Equity based LTIs are better adjusted to shareholders´ interests, to a certain acceptable dilution level. Full disclosure of targets, amounts and schemes is mandatory.

b. Performance Conditions. Measures and vesting conditions need to adapt to the company´s singularities. And according to the guidelines, certain principles apply and are preferred by shareholders, among which we select only the most relevant ones:
i. Shareholders prefer financial metrics that are linked to value creation.
ii. No retesting of performance metrics should be allowed.
iii. The outcome of any scheme must be in line with the company`s performance and prospects.
iv. Peer groups must be representative and relevant, so that no arbitrary result is produced, and no vesting should be executed         under the median result.
v. Operational metrics when used should connect rewards with growth, efficiency and careful risk-taking.
vi. Where TSR is used, the company should justify that it reflects the company`s performance.

c. Vesting. “Sliding scales and graduated vesting profiles” behave better than single hurdles; besides, vesting amounts in each hurdle shouldn`t be relevant compared to base pay.

d. Grant size. Certain corrections need to be introduced to the schemes after irregular events affect the share price, to prevent them to produce unexpected windfall gains for executives.
e. Cost must be disclosed.

f. Change of control. Early vesting should only occur on a pro-rata basis, and no conditions should be waived, so that the main reason for eventual awards remains financial performance.

g. Pricing and timing. Shares and options shouldn`t be issued or granted at prices below the mid market level, no repricing of underwater options being allowed.

h. Life of schemes. Schemes should not remain in excess of ten years, no award should be done out of this period, no share or option should vest in less than three years, and employment termination should derive proportionate vesting results.

i. Dilution. They recommend that shares or rights issued in every ten-year period do not exceed 5% of ordinary capital or 10% when aggregated to all other live schemes.
(1) The guidelines can be downloaded here, https://www.ivis.co.uk/media/11101/Principles-of-Remuneration-2015-Final.pdf, and are dated 11th November 2015.

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