UK: Executive remuneration – new ABI principles and BIS discussion paper

The ABI has published new executive remuneration guidelines, while BIS has published a discussion paper on the governance of executive remuneration in quoted companies, seeking views on possible measures to more closely link executive pay with long-term company performance. Comments are invited by 25 November 2011.

The Association of British Insurers (ABI) has published a revised version of its Principles of Executive Remuneration. The previous version was published in December 2009.

There are 20 principles grouped into five categories: the role of shareholders; the role of the board and directors; the remuneration committee; remuneration policies and remuneration structures. The principles are accompanied by guidance to help remuneration committees apply the ABI's principles and additional guidance to assist remuneration committees on the implementation of remuneration policies and structures.

Issues covered in the ABI's principles and guidance include:

• Quantum of remuneration The ABI states that remuneration committees are responsible for ensuring that the amount of remuneration is appropriate. Useful references points which remuneration committees could use when establishing the appropriate amount of remuneration for directors include a stated policy which links aggregate remuneration to overall corporate performance and the remuneration policy of the company as a whole.
• Benchmarking Remuneration should not be set purely by simple benchmarking against peer companies although benchmarking may be used as a point of reference when establishing the appropriate level of pay for a particular job. The ABI believes that the continual matching of pay to the perceived median has contributed significantly to spiralling levels of pay.
• Alignment of remuneration Remuneration committees should consider executive remuneration in the light of the pay policy for the company as a whole, pay and conditions in other parts of the group and the cost to shareholders overall.
• Claw-back Shareholders expect remuneration arrangements to include claw-back or malus provisions and for these provisions to be enforced in appropriate circumstances. This approach has already been adopted for remuneration in financial services institutions under the updated Capital Requirements Directive (CRD3).

The principles are aimed at issuers on the Main Market but may be useful for companies on other public markets and other entities.

The ABI Principles of Remuneration are available from the IVIS website.
 

BIS discussion paper

Separately, BIS has published a discussion paper on executive remuneration, following on from its call for evidence on corporate governance ("A Long-term focus for Corporate Britain") published in October 2010 (see corporate e-bulletin 2010/34 for further details).

The discussion paper has been launched in conjunction with the second consultation paper on narrative reporting, which includes proposals relating to the reporting of executive remuneration (as described above).

The idea underlying the discussion paper is that there is a general disconnect between executive pay and long-term performance of companies. The discussion paper explores the factors which may have contributed to the considerable growth in pay for FTSE 100 CEOs over the last decade, which has outstripped the increase of the FTSE 100 index. The paper considers a number of options for improving the link between pay and performance, including:

• Role of shareholders – whether shareholders should have a binding, rather than merely advisory, vote on directors' remuneration and considers how this might work in practice. Views are also sought on further measures which could be taken to prevent directors being rewarded for failure and whether shareholder representatives should sit on nomination committees, which would give shareholders an active role in the selection of new directors.
• Role of remuneration committees – whether steps could be taken to strengthen remuneration committees. These include having independent members on the committee, involving employees in the process of setting executive remuneration and addressing potential conflicts of interest for remuneration committees, which may arise for example as a result of cross-directorships and the use of remuneration consultants.
• Structure of remuneration – if changes could be made to the structure of executive remuneration packages to improve the link between pay and performance. For example, it considers whether companies should defer a larger percentage of directors' pay for more than three years, and whether remuneration packages should be simplified or be subject to claw-back mechanisms.

Interested parties are asked to submit their views on the issues raised in the discussion paper by 25 November 2011.

The discussion paper and response form are available from the BIS website.