Post-vest holding requirements, malus and clawback provisions
2017 has been a significant year for Executive Pay in the FTSE 100.
Many FTSE 100 companies took their Remuneration Policy back to shareholders to obtain fresh approval for the first time, as their 3 year term of approval for their Policies expired. 2017 has also seen a continued focus on the features of Executive Pay from industry bodies, institutional investors and the media.
Tapestry have now completed our annual in-depth review of the FTSE 100 directors’ Remuneration Reports and Remuneration Policies focusing on these key themes:
- Post-vest holding requirements; and
Malus and clawback provisions.
We have refreshed and developed the findings of our FTSE 100 research from last year.
Key highlights from our research:
- 73% now have post-vesting requirements: The percentage of FTSE 100 companies disclosing post-vest holding requirements continues to increase. 2013: 4%, 2015: 47%, 2016: 53%, 2017: 73%. Some institutional shareholders have been keen to see longer time frames for awards under LTIPs and many companies now have added a post-vesting requirement to their plans. 24% of the FTSE 100 has either introduced or amended their post-vest holding requirements since last year.
- 6 months to 5 years post-vesting period: The range of FTSE 100 post-vest holding periods runs from 6 months to 5 years. 2 years continues to be the most popular length period. Financial services companies, with employees subject to various industry specific regulations, are increasing their minimum holding periods from 6 months to 1 year in line with European Banking Authority requirements.
- 93% of FTSE 100 have disclosed their malus and clawback triggers: This is an increase from last year where 88% of the FTSE 100 disclosed their malus and clawback triggers.
- Increase in same trigger for malus and clawback to 60% of FTSE: While some FTSE 100 companies have disclosed more detail about their malus and clawback provisions and triggers this year, others have disclosed less. There has been an increase in the number of FTSE 100 companies specifying the same trigger events for their malus and clawback provisions (2016: 46%, 2017: 60%). It was difficult for some companies to introduce malus and clawback policies 2 or 3 years ago but companies have been taking a look at their policies and streamlining them.
- Clawback periods vary greatly: The longest periods are in financial services companies who are required under industry specific regulations to have the power to apply clawback for up to 7 years post grant normally and up to years 10 in the event of ongoing investigations.
Companies are keeping the key design features of their incentive plans under review given the continuing shareholder and media focus on Executive Pay.
The latest corporate governance proposals released by the UK government, as detailed in our recent newsletter here, has also kept the discussion moving about what form it is appropriate for Executive Pay to take.
Companies should consider the use of a post-vest holding period (which plan to apply it to, which participants etc) and an appropriate length (is 2 years suitable for all companies?). The administration of holding periods is also important to set up properly and ensure thought is given to what happens to vested awards on termination of employment or other unforeseen circumstances. Malus and clawback provisions have quickly become prevalent in most listed companies plans but there are still many considerations about their design, what triggers to specify, how companies should exercise their discretion when to use them and the communications to participants about these powers. The global aspect also needs to be considered given the difficulties posed by some jurisdictions in successfully operating malus and clawback.
If you have any questions about our reports or about the design and operation of executive remuneration more generally, please do contact us – we are happy to help.
Janet and Jordan