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Response to governance and remuneration reporting requirement changes (September year-ends)

Mercer | Kepler has been monitoring how September year-end companies have been responding to last year’s changes to the UK Corporate Governance Code and the introduction of new remuneration reporting requirements in late 2018.  Whilst these changes officially come into effect for financial years commencing on or after 1 January 2019, as outlined below a number of companies with September 2018 year-ends have chosen to bring forward their adoption of at least some the changes. We set out below some of our key findings from the 28 FTSE All-Share companies which have reported so far:

Recap of remuneration reporting requirements In June 2018, the UK Government adopted a number of additional requirements under the Companies (Miscellaneous Reporting) Regulations 2018.  A recap on the key requirements and compliance to-date as follows: Requirement: Summarise any discretion exercised by the Committee in relation to directors’ remuneration outcomes in the Remuneration Committee Chair’s Annual Statement.

Compliance: Companies have generally complied with this requirement where there has been discretion applied during the year, and have typically continued to provide greater detail and rationale later in their remuneration reports.  For companies where no discretion has been applied, the application of this requirement is typically less obvious, although good examples exist (e.g. Avon Rubber). Requirement: Disclose how much of a director’s variable pay for the year is attributable to share price appreciation, and disclose if any discretion was exercised to limit the impact of share price changes. Compliance: Only a small number (4) of companies have complied with this requirement so far, with the approach taken varying between (i) splitting out the impact of share price appreciation in the Single Figure Table, and (ii) including relevant details as a footnote to the table. Of the companies that have ‘gone early’, only one has explicitly covered the requirement to disclosing whether or not discretion has been applied as a result of the share price appreciation. Requirement: Pay scenario charts illustrating the application of the Remuneration Policy for each director now need to indicate the maximum remuneration receivable assuming a 50% share price appreciation (for elements subject to performance targets or measures relating to more than one financial year). Compliance: Six companies have complied with this requirement so far.  The most common approach has been to illustrate a fourth scenario, in addition to the current minimum, on-target and maximum.  One company (easyJet) has included details as a footnote to the charts rather than presenting an additional scenario. Requirement: Companies with an average of >250 UK employees during the financial year are required to include calculate and disclose the ratio of CEO total pay to the total pay and benefits of those employees whose FTE remuneration is at 25th, 50th and 75th percentile for the company’s UK employee population. An accompanying narrative must include details of why a given calculation methodology was chosen; an explanation of changes in the pay ratios vs the previous financial year; and details of the trends in these pay ratios over time. Compliance: Perhaps unsurprisingly, this requirement has seen the most limited take-up amongst September year-ends.  Only one company (Mitchell’s & Butlers) provides disclosure in line with the new reporting requirements.  A small number (4) of companies reference the new requirement and their intention to disclose next year, although most have opted to remain silent in their 2018 remuneration reports.

UK Corporate Governance Code changes The UK Corporate Governance Code includes a number of new recommendations relating to the design of Executive Director remuneration.  Whilst some of these – such as the recommendation to structure long-term incentives with a minimum five-year time horizon – reflect long-held shareholder preferences and already widely adopted by UK companies, others represent a significant change from current market practice. Most notably, the Code suggests that pension contribution rates for Executive Directors should be aligned with those for the broader workforce, and that remuneration committees should develop formal policies for post-employment shareholding requirements. Noting that only 6 of the 28 companies are submitting a new Remuneration Policy to shareholders this year, compliance with the new recommendations to-date is as follows: Requirement: Pension contribution rates for Executive Directors should be aligned with the workforce. Compliance: In total, nine companies have made a change to their pension contribution rates for new Executive Directors.  Of these, 5 companies have committed that pension contributions for new hires will be in line with the broader employee population and are fully compliant with the new Code.  The remaining 4 companies refer either to reducing pension contributions to be in line with ‘senior management’ or have committed only to a rate lower than that for existing Executive Directors. With regard to current Executive Directors, two companies offer pension contributions in line with the broader employee population (and had done prior to publication of the new Code).  A further 3 companies have committed to an overall reduction in pension rates for existing Executive Directors, either with immediate effect or phased over time. Requirement: Develop a formal policy for post-employment shareholding requirements. Compliance: Only one September year-end company has adopted post-employment shareholding guidelines this year.  Ei Group will require Executive Directors to hold 50% of the guideline that applied to them at the date of cessation (or if lower, the actual holding excluding personal investment), reducing to nil over a period of 24 months.  It is worth noting that whilst this complies with the Corporate Governance Code, it falls short of the requirements set out in the latest IA Principles of Remuneration.  A further 3 companies make reference to the new Code recommendation and commit to monitor market practice and investor expectations over the coming year. Mercer | Kepler commentary and next steps Given the publication date of the new UK Corporate Governance Code and related guidance from shareholders and investor bodies, it is perhaps unsurprising that few September year-end companies have chosen to reflect the Code recommendations in their Executive Director remuneration policies this year.  Though compliance next year would still technically be ‘going early’ (with the Code effective for financial years commencing on, or after, 1 January 2019), given shareholder pressure – particularly around pensions - we expect that more of these companies will make changes in time for their next reporting cycle.

More surprising perhaps has been the limited uptake on new remuneration reporting requirements, with many of these being relatively simple additions to existing disclosures.  Again this may simply come down to reporting deadlines, and we therefore expect that many more December year-end companies will be complying with at least some of these new requirements in their 2018 reports.  This briefing is for general guidance and does not necessarily cover all areas of the topics included in this briefing. It is not designed to give legal or other professional advice.

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