UK: Directors' remuneration – revised remuneration principles published by ABI

The Association of British Insurers (ABI) has published an updated version of its Principles of Remuneration. The Principles were updated last year to reflect the reforms to executive remuneration (see our corporate e-bulletin 2012/31). As a result, there are relatively few changes this year.

The changes to the Principles to reflect the ABI’s current views include:

• 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 Appendix to the Principles has been revised to reflect the new directors’ remuneration reporting and voting regime. The Appendix sets out the following views of the ABI on the new regime:

• it supports the GC100 and Investor Group Guidance on the regime (see item 4 below);
• in normal circumstances, the Remuneration Policy should be voted on every three years (rather than annually) so that the company’s remuneration strategy is aligned with the long-term business strategy;
• the Remuneration Policy should come into effect immediately after approval by shareholders; 
• it would be beneficial to shareholders if the policy table is disclosed annually;
• the provision which permits non-disclosure of performance targets where they are commercially sensitive should be used by exception and be clearly justified to shareholders;
• companies should provide a full and clear explanation of key decisions that the remuneration committee has made and the reasons for these; and
• shareholders recognise that flexibility is required for recruitment of new directors, but shareholders will not support excessive limits within a policy.

The letter from the ABI describing the changes and the revised ABI Principles of Remuneration are both available from the IVIS website.