2012 RREV UK Remuneration Guidance
07 December 2011
RREV has published updated guidance on the remuneration issues on which it will focus during the 2012 AGM season.
Background
By way of background, RREV provides voting guidance in respect of FTSE All Share company meetings to members of the NAPF in the UK and subscribers to the ISS service in the US. NAPF members account for around £800bn of assets invested in the UK, while ISS is the leading US proxy advisory service. As a result of the US link in particular (where US institutions often automatically follow ISS recommendations), RREV has a significant influence on votes cast at FTSE All Share meetings (arguably more so than the ABI).
What has changed?
There is little within the updated guidance that can be considered 'new news', with the guidance similar in tone and content to the updates produced in each of the past two years (i.e. generally encouraging restraint in executive pay). The core principles on which RREV formulate voting recommendations remains the ABI Principles of Remuneration which form part of the NAPF guidelines. However, the guidance does include some changes of emphasis in terms the key issues RREV will consider in 2012 when formulating its voting recommendations.
Key Changes and Points to Note
Quantum: Not new but, in the current economic environment, continued restraint in quantum is called for. It is suggested that shareholders have little appetite for a return to pre-recession levels of pay inflation.
This sentiment is reflective of our understanding of shareholders' views more generally and, as a result, robust justification will be required in respect of any increase in quantum whether to base salary, pension, annual bonus opportunity or long-term incentive grant levels.
Consultation: Engagement by Remuneration Committees is expected to be meaningful, timely and responsive and should take place prior to the finalisation of changes to the remuneration package, whether or not they require a separate shareholder vote. This is a strengthening of previous guidance.
The appropriate form of consultations (i.e. letter or face-to-face meetings) should be considered in light of the specific changes under review in each circumstance. Generally, for modest policy changes which do not increase quantum, we suggest no consultation is necessary.
Mid Year Policy Adjustments: RREV do not generally favour amendments to a predetermined policy part way through a year. RREV will only support such a change of policy where the company can demonstrate 'exceptional circumstances'. This is a strengthening of previous guidance.
Annual Bonus: RREV are again calling for greater transparency in respect of annual bonus with full retrospective disclosure of the targets set and the extent to which they were achieved. RREV expects bonuses to move up or down in line with profitability albeit capped at a predetermined maximum. In addition, deferral and clawback are encouraged and this should not lead to higher quantum.
While this is not new guidance, we anticipate justification of annual bonus payments in light of company performance to be a key shareholder issue in 2012. We anticipate increasing pressure on companies to disclose retrospectively the actual range of targets set and the performance achieved. As a result, it is timely to revisit current Directors' Remuneration Report disclosures (in terms of content, style and format) to ensure they remain appropriate.
Long-term Incentives: as set out in previous RREV guidance, where companies are lowering performance targets in light of current economic conditions, there should be a lowering of the amount that can vest and, similarly, any increase in award size should be linked to more challenging targets.
New guidance has been provided in respect of target-setting for 2012 long-term incentive awards which requires companies' forecast level of performance to be located well within the lower end of the target range.
In light of current economic circumstances, the range of targets set and the shape of the vesting curve will be a focus for shareholders in the 2012 AGM season. As a result, a robust justification of any revised target range will need to be presented.
Service Contracts: Service contracts continue to be a key focus for RREV and their guidance has been strengthened vis-à-vis their 2010 update. It is expected that companies will have a policy in place for new service contracts whereby termination payments are limited to one year's base salary and benefits and that any such payment is subject to mitigation. Where payments in excess of this level are made, RREV will seek an explanation from the company as to the basis for such a payment.
In addition, 'good leavers'' share awards are expected to be pro-rated for time and for performance conditions to apply. Any use of discretion should be justified.
Where termination payments do not appear to be justified, RREV may recommend a vote against the Directors' Remuneration Report or, in extreme cases, the Chairman of the Remuneration Committee.
Majority practice continues to be to operate contracts that do not specify a predetermined level of compensation on termination. As a result, the key issue to consider is whether the company's approach to mitigation is sufficiently robust. Should policy continue to be to provide a contract that includes a liquidated damages clause that guarantees a payment beyond base salary and benefits on termination, it is timely to review current policy in light of the above.
The complete RREV update can be accessed through the following link:
http://www.issgovernance.com/files/ISSRREV2012UKRemunerationGuidance20111202.pdf
Please contact your usual New Bridge Street adviser if you would like to discuss the points raised in this briefing.
This update is intended to highlight issues and not be comprehensive, nor provide specific advice. Aon Hewitt Limited does not accept nor assume any responsibility for any consequences arising for any person as a result of them using or relying on the information contained in this briefing.
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