Institutional investors set out stance on payment of "allowances" in new guidelines on executive pay

Out-Law News | 21 Oct 2014 | 4:58 pm | 3 min. read

Variable "allowances" should generally not be included as part of directors' fixed pay because they are "inconsistent with the spirit of simplicity, clarity and pay for performance", according to new guidelines published on behalf of institutional investors.

The change is included in the latest version of the Principles of Remuneration (18-page / 320KB PDF), now published by the Investment Management Association (IMA) following its merger with the investment affairs division of the Association of British Insurers (ABI). In the only change from the ABI's 2013 guidelines, the IMA said that company remuneration committees should "clearly justify" and explain why they thought any allowances were necessary as part of the company's overall remuneration package.

The highlighting of 'allowances' as a particular area of concern follows the publication last week of a formal opinion by the European Banking Authority (EBA) criticising the way some EU banks classify 'role-based allowances' (RBAs) as part of bankers' fixed pay packages. The EBA said that it was concerned that by doing so, banks could be paying more to those staff in bonuses than they are permitted to under EU law.

"The very clear objection to the use of 'allowances' as part of fixed pay will increase the pressure on a number of banks who are already grappling with the EU bonus cap and the interaction of financial sector regulation with the broader directors' pay regime," said share plans and incentives expert Matthew Findley of Pinsent Masons, the law firm behind Out-Law.com.

"The main development ahead of this year's AGM season was the emergence of the 'clarificatory statement', or the 'public assurance' as it is described in the principles. The fact that the principles confirm that details of any such assurance must be included in the next remuneration report is not unexpected, and companies will welcome that they do not need to seek approval of a revised pay policy to incorporate details of any assurance they have given," he said.

In a letter to company remuneration committees distributed with its updated guidelines, the IMA said that its members had "generally been positive" about how companies had applied the new rules on remuneration during the first AGM season following the changes. However, it used the letter to re-state the need for companies to consider longer holding and performance periods, improve consultation with shareholders and more clearly demonstrate the link between pay and performance.

"The fact that there are no significant changes to the principles this year reflects that, as the IMA sets out in its letter to 'remco' chairmen, its members were generally positive about the first AGM season under the new executive pay regime," said remuneration expert Suzannah Crookes of Pinsent Masons. "Companies will welcome the fact that they are not entering the second year of the regime with a new set of principles and guidance to accommodate in the implementation of the policies approved by shareholders during 2014."

"The introductory letter contains a summary of particular areas of concern for IMA members, which will be of interest to companies looking at the implementation of their approved pay policies as well as to those designing revised policies either this year or in future years. There is a degree of consistency with the areas of recent change to the UK Corporate Governance Code, which is unsurprising given investor responses to the FRC consultation in advance of these changes. Gearing of variable pay, and length of holding periods for long-term incentives, are now included within the Code as points for companies to consider," she said.

Those companies that would not be putting changes to their pay policies to shareholders ahead of their next AGM would also find a "potentially helpful steer" from the IMA on whether to include the full approved policy in their next annual reports and accounts, Crookes said. According to the principles, it would be "helpful" to investors if companies included the 'policy table' section of the policy in their reports each year, even though this is not strictly required by the regulations.

The IMA is the trade body which represents the interests of the asset management industry, including both retail and institutional assets. Its remuneration principles are updated annually to take account of any trends and events emerging from the previous corporate AGM season, and set out the views of the IMA's members on executive pay. The document has become particularly influential following the introduction of the Directors' Remuneration Reporting Regulations in 2013 and binding shareholder vote on executive pay.

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. This information can then be used by company shareholders when exercising their legally-binding vote on the company's executive pay policy. Company remuneration policies are expected to last for three years.