The Investors Association (IA) have, with the Institutional Voting Information Service (IVIS), produced a practical approach to tackling the application of the IA’s latest Principles of Remuneration at AGMs in 2019. The result is a clear warning to UK listed companies that their Executive Remuneration Polices are more at risk than ever of being voted down by investors.
This Alert provides you with a summary of IVIS’s new approach, what you should consider in advance of your upcoming 2019 AGM and some practical advice in our Tapestry Comment.
Notably, IVIS clarified its approach to ‘red-topped’ and ‘amber-topped’ remuneration reports and policies. This traffic light system reflects compliance with best practice and is heavily relied upon by shareholders, who will likely approve or reject a report based on this guidance, making compliance with the IA Principles integral to the approval of executive remuneration. The approach covers post-employment shareholding periods and pensions and is summarised below.
Post-employment shareholding periods
- The latest IA Principles state that executive shareholdings should be significant and that companies should impose a post-retirement shareholding requirement of at least two years. In particular, this requirement should be ‘established for all new executive directors and for existing executive directors at the earliest opportunity and at a minimum by the company’s next policy vote’.
- Remuneration policies being put to shareholder vote this year should include post-employment holding periods in line with the IA Principles. If not the policy will be ‘amber-topped’ by IVIS.
- If there is no policy vote this year, those companies not in line with the Principles will be ‘noted’.
This is a development reflecting the latest UK Corporate Governance Code. Post-employment holding periods are a relatively new tool in driving “good” corporate behaviour in executive remuneration but this is now unambiguously headline news for companies. For many companies this requirement will require a review of existing plan documents and shareholding policies. Given the pointed tone of the IA in their guidance, this needs to be started now! Companies will need to consider how these new shareholding requirements will be implemented and enforced, as well as how their existing executive shareholding arrangements will operate practically. We can help design and draft the terms of such mechanisms, as well as assisting you with your disclosures and remuneration report compliance. If you would like advice on this, please let us know.
Executive Director Pensions
- New Remuneration Policies: Companies should make it explicit that executive pension contributions should be set in line with the majority of the workforce. Failure to do so will result in the report being ‘red-topped’ by IVIS.
- Remuneration Report Implementation: If new appointees from 1 March 2019 have pension contributions at a higher level than those provided to the majority of the workforce, the Remuneration Report will be ‘red-topped’.
- Remuneration policies and reports where an Executive Director receives a pension contribution of 25%, or more, will be ‘amber-topped’.
- Companies should disclose the pension contribution level which they consider to be the level for the majority of the workforce and their Remuneration Reports should confirm if the pension contributions for new joiners, new appointees or existing executive directors are at that level for the majority of the workforce.
This guidance reflects the changes to the UK Corporate Governance Code and adds ‘teeth’ to the comply or explain approach through the red-topping and amber-topping of non-compliant policies and reports. Setting the appropriate level of executive pension contributions is now critical, as a red-topped report substantially increases the likelihood of the policy being voted down by shareholders.