Remuneration, in particular in relation those in the financial services sector, has remained a hot topic since the first banking crisis in 2007 and has attracted much attention from politicians and newspaper editors alike.
Recently the spotlight has been expanding, and in addition to the financial services sector, executive remuneration in companies has very much been the focus for 2011.
Companies are not short of guidance as they begin to prepare for this year’s bonus round! The Association of British Insurers (ABI) published its new guidance on executive pay on 29 September 2011, shortly followed by the Financial Services Authority’s (FSA) revised “Dear CEO” letters providing guidance on issues relating to remuneration. The Department for Business, Innovation and Skills (BIS) published a discussion paper on executive remuneration in September.
A few of the headline points that you might like to think about when considering the bonus round this year are outlined below.
Perhaps as a result of press attention, the ABI has focussed more than ever on the quantum of executive pay. Some key points are as follows:
Bonuses should be clearly linked to business targets. Performance targets:
In relation to the long-term incentives, the ABI and the Government have emphasised the need for careful tailoring when using performance measures such as total shareholder return (TSR) relative to an index or peer group. The Government also suggested that shareholders welcome measures directly linked to company strategy used in addition to TSR and/or earnings per share (EPS).
The ABI emphasised that the practice of “retesting” performance conditions (most common in relation to long-term incentives) was unacceptable. However, if the business has suffered an exceptional negative event, payment of annual bonuses is discouraged by the ABI even if some specific targets have been met.
Clawbacks and “malus”
Clawback is a key focus of the FSA and ABI, clawback provisions seek to avoid executives receiving “undeserved” remuneration.
“Malus” means the use of “downside” adjustments to adequately balance “upside” incentives. Malus must be built into Long Term Incentive Plan (LTIP) rules in order for LTIPs to be included in the FSA Code’s 50% deferral threshold required in relation to variable remuneration. The ABI has now also called for malus to be built into incentive schemes and executives contracts.
“Malus” can be achieved by:
The key messages coming from the ABI and FSA have remained consistent. Remuneration decisions should be focussed on appropriate remuneration and the aligning the interests of executives with those of company stakeholders.
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