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Public Companies Update January 2005
1
ABI Guidelines on Executive Remuneration
Directors' remuneration is a key issue in the corporate governance
forum and the guidelines on remuneration published by the
Association of British Insurers ("ABI") are designed
to provide a practical framework and reference point for both
shareholders in reaching voting decisions and for companies
in formulating their remuneration policy.
In December the ABI published a revised version of its principles
and guidelines on executive remuneration. The amendments include:
| 1 |
Reinforcement of the principle that executives
should not receive variable and share-based remuneration
unless accompanied by robust performance criteria and
that Remuneration Committees need to satisfy themselves
as to the accuracy of recorded performance measures that
govern the vesting of such remuneration; |
| 2 |
A clarification of the view that chairmen,
as well as independent non-executive directors, should
not receive share incentives geared to the share price
or performance as this could impair their ability to provide
impartial advice and oversight. Where, in exceptional
circumstances, specific reasons arise and the company
wishes to grant share incentives to a chairman, these
must be approved by shareholders in advance and any shares
awarded under such a scheme must be held by the Chairman
for the duration of his term of office; |
| 3 |
A suggestion that awards should be structured
to promote as close an alignment as possible of participants
with the risks and rewards faced by shareholders; |
| 4 |
A call for greater transparency
with regard to bonuses - when a bonus has been paid, shareholders
will expect to see analysis in the Remuneration Report
of the extent to which the relevant targets were actually
met. |
| 5 |
A reminder that it is not the responsibility of companies
to compensate individuals for changes in personal tax
liabilities and a recommendation that Remuneration Committees
carefully consider what role additional pension accrual
continues to play as against other forms of remuneration;
This comes in view of impending changes to pensions
taxation and companies are encouraged to disclose any
structural changes in remuneration in anticipation of,
or as a result of such tax changes;
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| 6 |
A suggestion that the rules of incentive schemes could
require a proportion of shares to which senior executives
become entitled to be withheld until such time as shareholder
guidelines are met;
This supplements the old guideline that companies are
encouraged to require their senior executives to accumulate
meaningful shareholdings in the companies in which they
work.
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| 7 |
Measures to discourage windfall payments
to executives on change of control of a company - the
new guidelines state that schemes should pay out only
to the amount of the performance period that has elapsed
prior to the change of control and any payment should
reflect the underlying financial performance of a company.
Remuneration Committees are to use best endeavours to
provide "meaningful" disclosure that quantifies
the aggregate payments executives will receive on a change
of control; |
| 8 |
A recommendation that companies structure
long term incentive plans so that dividends accrue and
are paid to the recipients once the shares vest, the ABI
believe this better aligns management interests with those
of shareholders; |
| 9 |
A recommendation that prior to the introduction
of new international accounting standards (see article
4 below) companies inform shareholders as to the approach
they will take to adjusting performance hurdles to ensure
there is a consistent measurement of performance. It is
suggested that this is addressed by the inclusion of a
clear statement in the next Remuneration Committee Report.
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A copy of the full guidelines can be found at www.ivis.co.uk/pages/gdsc2_1.PDF.
Conclusion
Coming on top of the mounting press criticism of increasing
executive remuneration, the ABI's statement demonstrates that
institutional shareholders are adding their weight to the
press criticism in an effort to control the increasing packages
offered to executives. Clearly this is a topic which will
need to be focused on by companies and advisers when considering
packages offered to directors.
If you require further information on any matter covered in
this note, please contact your principal contact at Charles
Russell or Simon
Gilbert, Katy
Knight, Clive
Hopewell or Alexander
Keepin (London), Francis
Rundall or Richard
Norton (Cheltenham) or Catherine
Drew or Geoff
Sparks (Guildford) on 0207 203 5000.
To download these articles in pdf format, please click
here
Please note that the summaries above are
a general indicative guide only. They are not exhaustive.
This information has been prepared by the firm as a service
to our clients. As it is a general guide, we recommend that
you seek professional advice before taking action. No liability
can be accepted by the firm for any action taken or not taken
as a result of this information. The firm is not authorised
under the Financial Services and Markets Act 2000 but we are
able in certain circumstances to offer a limited range of
investment services to clients because we are members of the
Law Society. We can provide these investment services if they
are an incidental part of the professional services we have
been engaged to provide.
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