Update on LGIM's Principles of Executive Remuneration
Legal & General Investment Management (“LGIM”) has now published an update to its Principles on Executive Remuneration, which includes a number of changes on how it will assess the executive remuneration policies of companies that it invests in. These changes are largely in line with the Investment Association’s latest Principles on Remuneration and the revised UK Corporate Governance Code. However, on occasion they set higher expectations. Notable changes include:
CEO pay ratio – an expectation for all companies (not just those with >250 UK employees) to disclose CEO pay ratios, and for the calculation to be based on Option A (i.e. calculate ‘single figure’ remuneration for all staff);
Annual bonus – any increases to annual bonus opportunities in future policies will not be supported by LGIM. The maximum bonus opportunity should be no more than 200% of salary, and this maximum should apply for the largest companies only;
Performance metrics – the weighting of strategic/qualitative and personal objectives should be limited to a maximum of 25% of salary;
Shareholding requirement – the level of shareholding requirement should be linked to the total variable remuneration opportunity. LGIM expects the following minimum levels of shareholding requirement: FTSE1-30, 5x salary; FTSE31-50, 4.5x salary; FTSE51-100, 4x salary; and
Post-cessation shareholding requirement – a requirement for executive directors to retain a material shareholding for two years post-exit, e.g. 3x salary for a FTSE100 company.
Further detail on LGIM’s latest Principles
Structure and operation of the Remuneration Committee
The Remuneration Committee is expected to set the remuneration policy for the Chair and senior management, as well as the Executive Directors.
The Remuneration Committee should seek independent advice, and use its own independent judgement in assessing third party advice.
The Committee should be able to demonstrate how executive pay and policies are related to those of the wider workforce.
LGIM will now vote against individual directors where LGIM have voted against a remuneration resolution in two consecutive years
Where there is >20% opposition on a remuneration resolution, the Remuneration Committee is expected to publish an explanation when reporting on the voting outcome, as well as sending this explanation to the Investment Association and including it in the Committee Chair’s Annual Statement for the following year. Consideration should also be given to re-tendering the role of remuneration advisor, if the advisor’s advice was relied upon and resulted in the vote against.
Pay principles Transparency in the Annual Report
The company should detail its engagement with stakeholders about how executive pay aligns with wider company pay policies.
LGIM have set out that, when either upwards or downwards discretion is used, it expects disclosure of what the outcome would have been in the absence of discretion being applied.
When disclosing remuneration consultants fees, LGIM expect this to be split into fees relating to advice for the Remuneration Committee and other HR related advice
LGIM expects all companies, regardless if required, to disclose the CEO pay ratio, and for this to be calculated using Option A (unless there is a robust reason to choose another option).
LGIM will not support any increases to annual bonus opportunities in future policies. The maximum bonus opportunity should be no more than 200% of salary, and this maximum should apply for the largest companies only.
For new executive directors, pension contributions should align with the general workforce. Where contracts are re-negotiated for incumbent executives, this should include a move to aligning pension with the wider workforce. LGIM will vote against the remuneration policy if there have been no changes to address the disparity in pension provision by 2020.
In line the Investment Association’s Principles, a material fall in share price should be reflected in a reduction of the variable incentive opportunity.
Benchmarking should only be conducted periodically. LGIM suggests a frequency of every 3 years, or when making a new appointment to the Board.
Simple and understandable
LGIM will oppose any new matching plans, or proposed renewals.
LGIM is not supportive of ‘performance on grant’ awards or bonus banking schemes, and will generally not support one-off plans.
Performance metrics and targets
The weighting of strategic/qualitative and personal objectives should be limited to a maximum of 25% of salary.
Clarification that targets, where not disclosed prospectively, should be disclosed a year after payment.
Performance targets should not be adjusted retrospectively and should not generally be below the previous year’s out-turn.
LGIM provide additional clarity on the circumstances where restricted shares could be considered. Companies are expected to justify the need for such schemes and explain why current arrangements are no longer appropriate. Shares should be held for at least 5 years before release, and be subject to an underpin.
Malus & Clawback
LGIM expects all variable compensation to be subject to malus and clawback.
Companies should provide clarity on circumstances on when malus and/or clawback may be applied, although these should not be too narrowly defined.
Executive Director shareholding requirement should be linked to the variable remuneration opportunity. LGIM expects the following minimum levels of shareholding requirement: FTSE1‑30, 5x salary; FTSE31-50, 4.5x salary; FTSE51-100, 4x salary; and
LGIM encourage Executive Directors to use their own funds to buy shares to meet these requirements. Shares that have vested, those deferred as bonus, and those which are still subject to a holding period may count towards the shareholding requirement.
On leaving the company, LGIM expects EDs to be required to retain a material shareholding for two years post-exit, e.g. 3x salary for a FTSE100 company.
Recruitment and departures
Any relocation benefits should be limited to 2 years, and should be in line with those available to the wider workforce.
Employment contracts should be no longer than 12 months.
Mercer | Kepler commentary and next steps Many of the changes reinforce the IA Principles and changes to the UK Corporate Governance Code. However, there are some aspects for particular note:
LGIM’s expectation that all firms publish a CEO pay ratio, and that Option A be the basis for the calculation unless the company can justify otherwise. This creates potential additional workload for companies that would otherwise not be subject to the CEO pay ratio disclosure requirements, or for those who were considering other Options for calculating the ratio.
Aligning pension contribution rates with those of the workforce may sound logical, but this requirement may be problematic to implement if it is in breach of existing contractual obligations, but no compensation can be paid (as is the IA’s expectation). Given LGIM’s intention to start voting against companies where no action has been taken to address disparity in contributions rates by 2020, this will likely require some planning in the very near-term.
The reduction of strategic/qualitative and personal metrics to 25% of salary could unnecessarily constrain the design and operation of plans that would otherwise closely align with the company strategy over the medium-term.
Useful links LGIM’s Principles on Remuneration http://www.lgim.com/files/_document-library/capabilities/lgims-principles-on-executive-renumeration-2018.pdf
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.