'Timely' update to industry-investor group's executive pay guidance published

The GC100 and Investor Group, a working group which brings together leading institutional investors and some of the most senior general counsel and in-house lawyers working for FTSE100 companies, first published its guidance in September 2013. The updated guidance does not differ significantly from this version, but provides some additional clarification on topics including disclosure of performance targets, disclosure of maximum remuneration and the remuneration committee's use of discretion.

"This guidance is timely as companies work towards renewal of remuneration policies at the 2017 AGM," said share plans and incentives expert Suzannah Crookes of Pinsent Masons, the law firm behind Out-Law.com. "The additional clarifications in the guidance will be regarded as helpful - and it is also helpful for companies already planning for 2017 that there is no significant or unexpected change in the revised guidance."

"It is not surprising to see the guidance supplemented in relation to disclosure of performance targets, which has been an area of focus for the Investment Association, in particular that there should not be over-reliance on 'commercial sensitivity' as a reason not to disclose. There is also further emphasis on the requirement to disclose, in an appropriate manner, a maximum for every component of remuneration, including salary," she said.

Since October 2013, companies have been required to include more information about how directors have been and will be paid, along with how this relates to company performance, in their annual reports. .

The current rules give shareholders a legally binding vote on future pay policy at least once every three years, backed by an annual shareholder vote on implementation of the policy which is not directly binding on the company - although a majority against will trigger a binding vote on pay policy the following year. This means that the first policies subject to a binding vote under the new regime, and which have not previously been revised, will be due for renewal as part of the 2017 AGM season.

The changes to the guidance follow a "wide-reaching consultation process" conducted by the GC 100 and Investor group, which it said highlighted some areas requiring further clarification. In particular, it found that the guidance on disclosure of maximum remuneration "could be tightened in line with the regulatory intent", the group said in the preface to the document.

The guidance has now been clarified to reinforce the need to disclose the maximum level of each type of remuneration payable to each executive director, and to clarify that this must be explained "in monetary terms or any other way appropriate to the company (for example, a percentage of salary)". Where companies with overseas directors pay salaries in different currencies, this will also need to be clearly explained. Companies should describe the factors that the remuneration committee will consider when deciding what level of salary will be paid on an annual basis, "explaining how the basis on which pay is determined supports the company's strategic objectives", according to the guidance.

The group has clarified that the remuneration committee may use its discretion "in either an upwards or a downwards direction", with the former inevitably requiring "careful explanation and in certain cases prior dialogue with shareholders".

Flexibility, and the scope of this flexibility, should be provided for explicitly as part of the pay policy, as this will be "crucial in the implementation of a three-year approved policy", according to the document. However, any operational discretions should be specified "as clearly as possible", rather than by way of any general statement that all components of remuneration can be adjusted at the complete discretion of the committee, according to the guidance.

"Investors are likely to have concerns about the way such a broad discretion might be used, and so find it hard to approve the policy," the group said. "Equally, companies may find such a broad discretion difficult to exercise with confidence if (as will often be the case) there is any doubt that investors will agree."

Although the regulations do not require disclosure of "commercially sensitive" information on performance measures or targets, any decision to rely on this carve-out "should not be taken lightly", according to the guidance. Such a decision should only be taken if there are "company-specific circumstances that lead the directors to positively form the opinion that the performance measure or target in question is commercially sensitive", and after taking account of general investor expectations, according to the guidance.

Once that information is no longer commercially sensitive, it should then be disclosed in the next annual remuneration report, according to the guidance.

The group has also provided further guidance on the requirement in the regulations for the remuneration report to set out the percentage change from the preceding year of the chief executive's remuneration alongside the average percentage change in the remuneration of the company's employees generally. If the company opts to use a comparator other than the whole workforce, as allowed for by the regulations in some circumstances, it should ensure this group is "meaningful" and "not, for example, a narrow group of senior managers", according to the updated guidance.

"If Theresa May's call, in a speech two days before she became prime minister, for the publication of the ratiobetween the chief executive's pay and that of the average company worker becomes law, this new requirement seems likely to replace the requirement to report chief executive and average workforce increases," said executive remuneration expert Lynette Jacobs of Pinsent Masons. "Concerns over the selection of an appropriate comparator group are likely to be addressed in the drafting of any new pay ratio requirement, so this new guidance on comparator groups may then become obsolete."

Jacobs also pointed out that at the same time as this guidance was being finalised, the IA Executive Remuneration Working Group called for companies to consider whether they should redesign their long-term executive equity awards, which for some at least would mean a move away from the "almost standard" performance share plan with a performance period of three years or longer.

"The IA is expected to update its highly influential principles of remuneration in response to that report within the next six weeks or so," she said.

"Naturally this guidance predominantly addresses the prevailing executive remuneration model. For this reason it seems likely that a further updatemay be needed soon, to put companies and investors in the best position to engage with each other and respond creatively to calls for reform and innovation in the 2017 AGM season," she said.