This newsletter will be of interest if your company is listed, or if you advise listed companies.
 
ABI guidelines are relevant for all companies with a main market listing
The Association of British Insurers (ABI), which represents a significant number of UK institutional investors, has recently revised its guidelines on executive remuneration (Guidelines), which were last updated in 2009. These are relevant predominantly for companies with a main market listing.
 
The substance of the Guidelines has not changed to any great extent, but they do reflect the current political debate on the subject in commenting for the first time on the quantum of executive remuneration and recommending clawback provisions. They might be viewed as complementary to the discussion paper on executive remuneration published in September 2011 by the Department for Business Innovation and Skills.
 
The Guidelines include a set of over-arching principles as well as the guidance. These deal with the role of shareholders, the role of the board and directors, the remuneration committee, remuneration policies and remuneration structures.
 
In discussing the quantum of executive remuneration, the Guidelines state that “levels of pay that do not reflect corporate performance undermine the ability to reward success and represent excess rent extractions.....Shareholders are likely to object to levels of pay that do not respect the core principles of paying no more than is necessary and a linkage to sustainable long-term value creation.....Boards have a responsibility to ensure that [payment for failure]cannot occur both when negotiating new contracts and when agreeing any payments when contracts are terminated.”
 
Clawback provisions are recommended but the tax position is not free from doubt
The Guidelines go on to say that shareholders expect to see clawback provisions and a reduction in performance-related pay included in scheme designs and executive contracts, and for them to be enforced when appropriate. The income tax and National Insurance Contribution (NIC) position in relation to clawback is, however, not entirely free from doubt. Where remuneration has been paid and the income tax and NIC liabilities have been met, but the recipient is subsequently obliged to make a repayment under a clawback provision, there is no mechanism for the income tax and NIC liability to be adjusted. It seems unfair, however, that an employee should be liable for tax and NIC in respect of remuneration which has to be repaid. If clawback provisions become more widespread, it is to be hoped that HMRC guidance will be forthcoming which will clarify the tax and NIC position in such circumstances.
 
Listed companies should avoid adjusting remuneration to compensate for changes in personal tax position
A further comment in the Guidelines relates to changes in taxation, where the recommendation is for remuneration committees to avoid making changes to executive remuneration to compensate individuals for adverse changes in their personal tax position. This confirms concerns expressed by shareholders at the time when some companies were considering restructuring of remuneration arrangements in response to the introduction of the 50% tax rate in the 2010/2011 tax year.
 
The introduction of references to quantum and the renewed discussion on clawback clearly reflect the wider debate on executive remuneration at a political level. The FSA remuneration code already requires entities to which it applies to include clawback provisions in incentive arrangements, but the Guidelines indicate that the practice might now become more widespread among listed companies generally.