ABI and NAPF issue guidance for companies on directors' remuneration

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13 Dec, 2013

The Association of British Insurers (ABI) and National Association of Pension Funds (NAPF) have recently published statements of principles that they expect companies to consider when setting remuneration policies, as part of the implementation of the recent changes to the UK directors' remuneration reporting regulations. The principles set out complement the guidance published by the GC100 and Investor Group in September 2013 on implementing the revised legislation.

Both the ABI and NAPF have responded to the issuance of The Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013 (link to legislation.gov.uk) by setting out a number of remuneration principles that they expect companies to follow when designing their executive remuneration policy. As part of the new regulations, this policy will need to be included each year in the company's annual report.

These statements of principles are designed to be read in conjunction with the guidance (link to Practical Law website) issued in September 2013 by the GC100 and Investor Group, which sets out more widely the considerations facing companies when implementing the new legislation.

The ABI statement (link to IVIS website) is an update to their previously issued guidance on this subject. The significant changes from the previous version are:

  • Executive director and senior management shareholdings – Executive directors and senior management should build up significant shareholdings in companies.
  • Performance adjustment: malus and clawback – Remuneration structures should include provisions that allow the company, in specified circumstances, to forfeit all or part of a bonus or long-term incentive award before it has vested and been paid (“performance adjustment” or “malus”) and recover sums already paid to an executive (“clawback”).
  • Performance on grant schemes – Where performance is measured prior to grant, there should be clear disclosure in advance of the performance required, and achieved, to justify grants. Shareholders expect the amounts awarded to be significantly lower than under long-term incentive schemes which are subject to conditions.
  • Variable remuneration – Remuneration committees may consider non-financial performance criteria, for example relating to environmental, social and governance objectives, provided the link to strategy and method of performance measurement is clearly explained.

The main principles of the NAPF guidance (link to NAPF website) are:

  • Remuneration committees should expect executive management to make a material long-term investment in shares of the businesses they manage.
  • Pay should be aligned to long-term success and the desired corporate culture throughout the organisation.
  • Pay schemes should be clear, understandable for both investors and executives, and ensure that executive rewards reflect long-term returns to shareholders.
  • Remuneration committees should use the discretion afforded them by shareholders to ensure that awards properly reflect business performance.
  • Companies and investors should have regular discussions on strategy and long-term performance.

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