Executive Remuneration updates - Page 2 - Tapestry - Global Legal Compliance Partners

Tax - UK Tax-advantaged plan updates

4 May 2022

Spring has sprung by way of recent HMRC updates! HMRC have recently updated their guidance or revised their approach regarding several of the UK tax-advantaged plans. This alert covers:

a helpful update to HMRC’s Share Incentive Plan (SIP) guidance on acceptable SIP share valuation approaches; and
the end of the Covid-19 easements for Save As You Earn (SAYE) and Enterprise Management Incentive (EMI) share option schemes.

HMRC update SIP guidance on acceptable SIP valuation approaches

Prior to 2014, tax-advantaged plans were subject to formal approval by HMRC. Following the move to self-certification of tax-advantaged plans, HMRC highlighted (within its published guidance) some of the approaches which would previously have been agreed through the formal approval process, providing companies with additional certainty on what would be accepted by HMRC as compliant with the relevant legislative requirements. This guidance is important for companies considering what approach will be acceptable to HMRC and so on what basis they can “self-certify” compliance with the legislation.

HMRC have now updated their guidance relating to the market value of listed shares acquired under a SIP.

What are the changes?
HMRC set out what is regarded as an acceptable definition of “market value” in the plan rules of a SIP. The guidance previously stated that for listed shares, only a market value determined according to statutory principles was acceptable. These principles essentially required a company to use the closing mid-market value of the shares on an award date. The guidance also indicated that alternative valuation approaches would be accepted for the purposes of a SIP, being the mid-market value from the dealing day immediately preceding the award date, or an average of such values taken over up to five days. In practice however, these valuation approaches did not capture what many companies were actually doing.

New wording has now therefore been added to the manual to confirm HMRC’s position that additional alternative valuation approaches may be applied, including:

where shares are purchased on one day in a single purchase, the actual amount paid for the shares; and
where shares are purchased by multiple trades over up to five days, the average of the actual amounts paid for the shares.

Why are these changes helpful?
For SIP partnership shares, which are commonly purchased on the market with participants’ contributions from salary, it can be more convenient for companies to use the actual (or averaged) purchase price of the shares as the market value. This approach was previously commonly agreed with HMRC, but not expressly provided for in the guidance.

Following the move to self-certification and greater reliance on published guidance, companies continuing to operate SIPs in this manner would therefore risk the SIP being found to be non-compliant on a strict interpretation of the HMRC manual. As participants’ allocations of partnership shares were being calculated based on the actual prices paid for those shares on the market, not the market value determined according to the statutory principles, this might, amongst other things, have led to the “wrong” number of shares being awarded.

The change is therefore a positive result and gives welcome clarity for companies operating a SIP, enabling companies to choose to use the purchase price approach to determine market value, which can ease administration.

Tapestry comment
The issue with the previous wording in the HMRC manual was flagged to ProShare (the UK non-profit industry group that advocates employee share ownership) by Chris Fallon, Legal Director at Tapestry. ProShare then liaised with HMRC, who confirmed that the wording in the manual was not intended to adversely affect the administration of SIPs and updated the manual accordingly.

HMRC have been increasingly willing to impose penalties for minor perceived failure of tax-advantaged plans to comply with the legislative requirements. Many companies with SIPs were at risk of being penalised for using a common sense valuation approach. It was therefore great to see HMRC engage with ProShare on this issue and respond so positively and promptly on it, giving their blessing to a practical approach to operating SIPs.

HMRC provide new information on the end of the Covid-19 easements for SAYE and EMI share option schemes

SAYE - What are the changes?
Pre-pandemic, participants in a SAYE scheme could delay payment of up to 12 monthly contributions to their savings contract without the contract being cancelled.

In June 2020, HMRC amended the SAYE prospectus to allow SAYE participants to pause contributions for an unlimited period if they were on furlough or unpaid leave as a result of Covid-19.

HMRC have now published their latest Employment Related Securities (ERS) Bulletin, confirming they will bring the Covid-19 SAYE easement to an end. They have issued a new SAYE prospectus (in effect from 6 April 2022), which reverts to the pre-pandemic position. SAYE arrangements entered into before this date will be unaffected by the change.

There are helpful illustrative examples in the latest ERS Bulletin of how this change will apply in practice.

EMI – What are the changes?
Participants in an EMI scheme need to meet a working time requirement of at least 25 hours a week or, if less, 75% of their working time. Failure to meet this requirement makes employees ineligible to be granted EMI options or means that existing EMI options cease to qualify for the full EMI tax-advantages.

HMRC relaxed this requirement from March 2020 for employees who would otherwise have met this requirement but did not do so because of Covid-19. HMRC have now confirmed that the Covid-19 EMI easement has ended (from 5 April 2022), as provided for in the EMI legislation when the easement was brought in. Companies may therefore wish to reconfirm with affected participants that working time requirements will be met from this date.

Tapestry comment
The easements in respect of both SAYE and EMI during the early days of the Covid-19 pandemic were a pragmatic and very welcome response from HMRC to the disruption and uncertainty that the effects of lockdowns and furlough brought to the operation of UK tax-advantaged share schemes. The removal of these easements and therefore the return to the pre-pandemic positions is in line with the Government’s plans for living with Covid, with the hope that the periods of significant disruption to the workplace that it brought are now behind us.

If you have any questions on the above, or would like to discuss the operation of tax-advantaged or other incentive plans more generally, please do get in touch.

Please also watch out for our next alert on the UK's annual ERS return reminder, ahead of the 6 July deadline.

Chris Fallon and Paul Abthorpe

UK - Investment Association statement on the impact of Russian sanctions

22 March 2022

The economic effect of the Russian invasion of Ukraine is having increasing consequences across global markets, as the conflict continues and as further sanctions take effect.

Yesterday, the Investment Association (IA) responded to queries from remuneration consultants in relation to the potential impact of the current economic circumstances on forthcoming LTIP grants. The two key issues are:

The quantum of long-term incentive grants in light of the recent fall in share prices
The ability of companies to set LTIP performance targets against the current economic backdrop, and whether a six-month delay in setting performance targets would be appropriate

LTIP grant sizes

The IA notes that its Principles of Remuneration state that grant sizes should be scaled back following a share price fall, to address the potential for windfall gains to arise where grants are made over a larger number of shares than would otherwise have been the case, due to depressed shares prices. The IA confirms that its members would expect that approach to be followed in the current circumstances.

Delayed target setting

In the context of the COVID pandemic, the IA supported a six-month delay in the setting of LTIP targets, due to the widespread uncertainty across all sectors. The IA notes that the impact of Russian sanctions is more limited and affects a smaller number of companies, principally those with material profits or revenues arising from Russian operations or the Russian economy. It notes that many of its members are willing to support a delay in setting performance targets by companies with a material exposure to Russian operations or the wider Russian economy. There is an expectation that any such delay should be linked to statements from the company on the impact of the current situation, the management of its Russian operations as well as its overall financial position and performance. The IA notes specifically that increased energy costs and other aspects of the macroeconomic impact of the Russian invasion would not be sufficient justification for delaying target setting.

Tapestry comment
The situation in Russia and Ukraine remains highly volatile and the impact of the associated sanctions and restrictions will have a significant and extended impact for some businesses, and will need to be factored into those companies’ remuneration committee decisions. However this publication also makes it clear that, for the much larger number of businesses affected indirectly rather than directly by the current situation, the IA does not expect to see delays for LTIP target setting.

In making these comments, the IA has reiterated to remuneration committees that it believes they should be careful not to insulate executives from the wider impact of the economic uncertainty, particularly in a manner that is inconsistent with the approach taken to the general workforce. Remuneration committees for those companies materially impacted by Russian sanctions will therefore need to consider the position carefully and ensure that executives remain sufficiently aligned with other stakeholders through their remuneration structures.

Our thoughts remain with all those affected by the conflict.

Suzannah Crookes and Sarah Bruce

Executive Remuneration updates / Global updates / News / Newsletter / Press Releases - 03/23/2022

UK - Further Investor Guidance Published

4 March 2022

The Investment Association has published its “Shareholder priorities and IVIS approach” for 2022. Both this document and the recently released PLSA’s updated “Stewardship and Voting Guidelines” place emphasis on some key themes, including:

Climate change
Diversity and Inclusion
Stakeholder engagement

Whilst the topics may not come as any surprise, there is some interesting commentary in both documents which may be of interest to companies and their stakeholders.

Remuneration

The PLSA states that the average shareholder dissent to remuneration resolutions in 2021 was double the average in previous years and notes that the highest levels of dissent now apply to remuneration resolutions. This indicates the level of scrutiny of executive pay in particular in the recent context of the Covid-19 pandemic and rising costs of living. The PLSA calls on companies to show restraint on executive remuneration, particularly in the case of companies who have claimed Government support during the pandemic.

This comes in the context of the PLSA describing remuneration as a “litmus test” for wider corporate governance practices, and noting that significant pay discrepancies between senior executives and the rest of the workforce can indicate wider issues with a workplace’s culture and process, in particular where there is any discrepancy based on gender or ethnicity.

The IA “Shareholder Priorities” document does not have specific content on remuneration, as this is covered in its Principles of Remuneration (updated in November 2021). However, it does reference the role of remuneration committees in engagement with stakeholders and welcomes the leadership shown in the pandemic response. It mentions in particular the sensitivity shown to wider shareholder and stakeholder experience by ensuring remuneration outcomes were linked to that wider experience and not just to the outcome based on performance metrics. The IA goes on to reference its letter to Remuneration Committee Chairs in November 2021, noting that this consideration of the experience of major stakeholders will continue to be a critical investor expectation in 2022, as the effects of the pandemic and its aftermath are felt.

Tapestry comment
In addition to the specific comments related to remuneration which are referred to above, companies and investors may find the wider commentary from both the PLSA and the IA helpful in outlining their views around the wider issues of ESG, including specifically around climate change and new reporting requirements, as well as on topics of gender and ethnic diversity. Where these factors are reflected in pay structures and/or performance metrics they may also be of direct relevance for consideration of remuneration and reward throughout the organisation.

If you have any questions on the above, please do get in touch.

Suzannah Crookes

Executive Remuneration updates / Global updates / Newsletter - 03/04/2022

Hot News! Former CEO's awards suspended, pending investigations

23 February 2022

Barclays PLC announced it has “frozen” all of their former CEO’s unvested share awards. We do not normally see share plan stories in the press, so there are useful reminders for all companies in the detail behind the headline.

What has the bank said?

The bank announced in a statement: “In line with its normal procedures, the committee exercised its discretion to suspend the vesting of all of Mr Staley's unvested awards, pending further developments in respect of the regulatory and legal proceedings related to the ongoing Financial Conduct Authority (FCA) and Prudential Regulatory Authority (PRA) investigation regarding Mr Staley.”

Why has this happened?

There are ongoing legal and regulatory investigations regarding connections between former Barclays boss Jes Staley and Jeffrey Epstein.

Separately, the PRA and FCA expect certain firms to freeze the vesting of all awards made to individuals undergoing internal or external investigation that could result in performance adjustments, such as the application of malus and clawback. This is set out in PRA and FCA guidance available in full here and here.

It is also worth noting that the PRA and FCA expect certain firms to be able to extend the clawback periods for certain senior MRTs, where there are ongoing investigations that might lead to the application of clawback. This is set out in the Remuneration part of the PRA Rulebook at 15.20A here, and the FCA Handbook at SYSC 19D.3.61(4) here.

Why does this matter - the broader share plans picture?

Whether we are talking about financial services firms or not, malus and clawback are always a hot topic for executive share awards.

One area that can be overlooked is the impact of ongoing investigations that might result in malus or clawback being applied to awards.

It is widely accepted that malus (reducing or cancelling unvested or unpaid awards) is easier to enforce than clawback (recovering vested or paid awards). Where investigations are ongoing, suspending the vesting of awards is a useful way to extend the period during which malus can be operated. Companies could also extend the applicable clawback period in these circumstances, where necessary.

Companies should ensure they have a clear and robust contractual basis to suspend the vesting of awards and extend clawback periods in these circumstances. This can be achieved through carefully drafted “investigation provisions” in share plan rules and malus and clawback policies.

Tapestry comment
It is not often that we see share plans hitting news headlines – so whenever this happens it is always important to see if any lessons can be learned.

For impacted PRA and FCA regulated firms, this is a useful reminder of the PRA’s expectations when investigations are taking place that might result in performance adjustments - all unvested awards should be frozen until the investigations conclude. In addition, clawback periods for certain MRTs should be extendable where investigations that might lead to clawback are ongoing.

More generally, any companies with malus and clawback provisions should ensure that their plan rules and/or malus and clawback policies clearly provide for the suspension of vesting in the event of investigations, whether internal or external. Companies may also want the power to extend the applicable clawback period in these circumstances.

If you have any questions on the above, or need any help with your own “investigation provisions”, please do get in touch.

Matthew Hunter and Tom Parker

Executive Remuneration updates / Financial Services updates / Newsletter - 02/23/2022

Tapestry Alert: UK - The IA Principles of Remuneration 2022

18 November 2021

The Investment Association (IA) has this morning released its updated Principles of Remuneration, with the usual accompanying letter to Remuneration Committee Chairs setting out member expectations for the 2022 AGM season.

Full copies can be found here: 2022 Principles and RemCo Chair letter.

As expected, the 2022 Principles include an update on shareholder expectations regarding the effects of COVID-19 and its aftermath. Critical calls remain for companies to consider the wider stakeholder experience when determining executive remuneration outcomes, to disclose their approach, to show restraint where they have taken and not repaid government support, and to not pay annual bonuses in such cases. An updated statement on investor preference is also included to confirm that, where share prices have fallen, the grant size of future long-term incentive awards should be reduced, rather than relying on discretion at vesting to adjust outcomes.

Environmental, Social and Governance (ESG) metrics also remain high on the agenda, with investors now wanting a statement from those companies that have not already incorporated ESG metrics into their remuneration structures to explain how they will be incorporating these and the approach they will take in future years.

Other changes include a reminder on expectations regarding the alignment of executive pension contributions with the wider workforce (and the policy and report red-topping that will be imposed if this is not met for incumbent directors by the end of 2022) and a new section on the increasingly popular Value Creation Plans.

We will issue a further alert to take you through the changes to the Principles in more detail and the impact that we expect these changes to have. If you would like to see a comparison of the 2022 Principles against last year’s version in the meantime, then please get in touch.

Sally Blanchflower

Executive Remuneration updates / Global updates / Newsletter - 11/19/2021

UK IA Updates Guidance on LTIP Performance Conditions

24 February 2021

The Investment Association (IA) has today issued an addendum to its guidance published in November 2020 (Executive Remuneration in UK listed companies - Shareholder Expectations during the COVID-19 Pandemic), bringing back the ability to delay setting performance conditions for a reasonable period of time (6 months maximum) for companies who have been significantly impacted by the COVID-19 pandemic, until the continued impact of COVID-19 on the business is clearer.

The full updated document can be found here and the relevant new Addendum text is:

For companies who have been significantly impacted by the COVID-19 pandemic, Remuneration Committees may wish to make an LTIP grant at the usual time while delaying setting the performance conditions for these awards for a reasonable period of time (up to a maximum of six months), until the continued impact of COVID-19 on the business is clearer.

If committees decide to delay LTIP grants until further clarity is established, shareholders would still expect best practice to be a performance period of three years following grant. However, where this is not possible, committees may shorten the performance period by up to six months, contingent on the explanation provided by the committee and adequate post- vesting holding provisions being in place. Where the performance period is shortened, grant sizes should be similarly reduced.

The company should publish the performance conditions as soon as possible after they have been set via an RNS.

Tapestry comment:

The IA acknowledges that some companies are still struggling to set meaningful long term performance targets amidst the current further lockdown and ongoing COVID-19 restrictions, and further clarification from the IA on this point was anticipated. The reinstatement of the same provision found in their original April 2020 COVID-19 guidance (but not included in the November 2020 update) will be helpful to those companies who are once again struggling to set LTIP performance conditions at this time of year. Companies should, however, note that from the new provisions in bold above (which were not included in the April 2020 guidance), the IA are: 1. only expecting this route to be taken by companies who have been ‘significantly impacted’ by the pandemic; and 2. that performance conditions should be disclosed via an RNS as soon as possible after they have been set.

If you have any questions on the above, or any of the investors' requirements for the 2021 season, please get in touch.

Sally Blanchflower & Chris Fallon

COVID-19 updates / Executive Remuneration updates / Newsletter - 02/25/2021

UK: Glass Lewis publishes Covid-19 guidance

29 January 2021

Proxy advisor Glass Lewis has published guidance setting out how it intends to apply its proxy voting recommendations in light of the ongoing Covid-19 pandemic.

Glass Lewis is one of the most influential proxy advisory services and its views and voting recommendations regarding executive compensation carry significant weight with institutional investors. As such, companies preparing their Directors Remuneration Reports ahead of the 2021 AGM season should carefully consider this recent publication.

The publication is intended to act as an illustrative guide for how Glass Lewis would expect to apply its existing policies in the context of Covid-19-related scenarios. You can access the publication in full here and we have set out the key highlights below.

Pay-for-performance alignment

The publication highlights a number of specific focus areas for 2020/21:

Dividends. Executive pay outcomes should reflect where a company has cancelled or reduced the payment of dividends due to Covid-19.
Furlough and lay-off. Where a company has furloughed employees or reduced staff numbers or salaries, Glass Lewis would expect the remuneration report to explain how such measures were taken into account when determining pay outcomes for executives.
Stakeholder perspectives. Any concerns raised by stakeholders in respect of executive pay should be publicly answered.
Key financials. In addition to performance targets attached to awards, Glass Lewis may consider performance against other financial metrics, such as absolute and relative TSR, EBITDA, net profit, and historical year-on-year changes.
Equity grants and share price. The grant value and number of shares to be granted under long-term incentive equity grants will be scrutinised. Specifically, in situations where windfall gains are likely, Glass Lewis would expect a board to adjust the grant value accordingly and/or implement adjustments to other elements of executives’ pay to mitigate this effect.

Adjustment to pay policy and safeguards

Generally, Glass Lewis is opposed to adjustments to remuneration packages to reflect short-term macroeconomic situations. However, the publication states that it will consider limited one-off remuneration policy deviations provided appropriate safeguards are in place.

Target adjustment. Adjustment of targets for awards yet to be granted is generally reasonable, but where targets are adjusted downwards there should be limits imposed on future pay-outs.
Coronavirus-specific metrics. If bonus plans already contain annual non-financial metrics, Glass Lewis will accept that these metrics could include Covid-19-related targets. However, this does not extend to the introduction of such non-financial metrics where they did not exist previously.
Long-term incentives. If a board chooses to exclude fiscal year 2020 from the calculation of the final level of performance target for outstanding long-term awards, the value of the affected grant should be reduced proportionately.
Retention awards. Glass Lewis generally does not like one-off retention awards but accepts that there might be circumstances where these are appropriate such as where a company’s standard incentive plans have resulted in a nil pay-out.

Holistic look at pay outcomes

For companies affected by the Covid-19 pandemic, Glass Lewis is expecting generally lower pay outcomes than previously. Adjustments to base salaries are not anticipated, but boards should use their discretion when deciding whether to implement anticipated salary increases.

Wider workforce. Concerns regarding executive remuneration may be mitigated where a company excludes their executives from proposed adjustments or expands the advantageous effects to below-board employees.
Disclosure of adjustments. Any adjustment to remuneration should be supported by thorough disclosure detailing why the adjustment is necessary, (for example, in terms of retention, exceptional efforts by the executive team, or good relative performance). In a situation where there may be a case for a downward adjustment, if the board resolves not to exercise its discretion to adjust, the rationale for this decision should be disclosed.
Unaffected companies. Where companies have not been significantly affected by Covid-19, they should not deviate from their planned remuneration policy.

Tapestry comment
Effective reward programmes are an essential tool to incentivise, motivate and recruit talented individuals who will be responsible for guiding companies through these exceptional times. However, these programmes need to be balanced with a strong link between pay and performance, and being able to evidence this alignment to shareholders is increasingly important.

As Glass Lewis points out in this latest guidance, the burden on issuers for increased disclosure is higher than ever this year, to ensure that stakeholders can fully understand and evaluate remuneration-related decisions. We have certainly seen this across the updated guidance issued by other large and institutional investors in the last couple of months. As we saw with the recent publication of the Investment Association’s shareholder expectations for 2021, the calls go wider than just Covid-19-related disclosures, including climate change disclosures and progress against diversity targets, which could lead to receiving an amber or red top from IVIS if companies are not meeting the required standards (see our recent update here).

Companies will need to consider all the new disclosure requirements when preparing this year’s annual reports.

We recently held a webinar covering Q4 2020 updates to remuneration-related guidance from key institutional investors, looking at their approach to performance conditions (in-flight adjustments and for new awards), ESG metrics, 2020 bonuses, 2021 LTIP awards, post-employment shareholding requirements and all the new disclosure requirements, amongst other matters. If you would like a copy of the recording of the webinar, please let us know.

If you have any questions about the new disclosure requirements this year, or would like any help with your Directors’ Remuneration Report, then please do get in touch.

Hannah Needle FGE & Sarah Bruce

COVID-19 updates / Executive Remuneration updates / Global updates / Newsletter - 01/30/2021

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