UK remuneration policy renewal: 10 top points to check this year

As the 2020 AGM season fast approaches, we set out below our top 10 issues to consider if you are renewing your remuneration policy this year.

It reflects the main changes being pushed by institutional investors and the most common issues we come across when advising on board hirings and firings.  

If you would like help reviewing your remuneration practices, please contact Alice Greenwell, Charles Smye, Guy Huffen or your usual Freshfields contact.

1. Pensions 

The 2018 UK Corporate Governance Code outlines that the pension contribution rates (or payments in lieu) for executive directors should be aligned with those available to the workforce.  

The Investment Association (IA) has outlined that companies should put forward a credible plan for the alignment of executive pensions with the rest of the workforce by the end of 2022.  

The IA's Institutional Voting Information Service (IVIS) has announced that, for companies with year-ends starting on or after 31 December 2019, it will ‘red top’ any company with an existing director who is paid 25 per cent or more of salary as a pension contribution if a credible alignment plan is not in place. 

IVIS will also ‘red top’ any company that appoints a new executive director (or where a director changes role) with a pension contribution out of line with the majority of the workforce, or seeks approval for a new remuneration policy that does not explicitly state that new directors’ pension contributions will be set in line with the majority of the workforce.  

In its Policy Updates for 2020 document (PDF), Institutional Shareholder Services (ISS) has said that pension arrangements for new executives must be aligned with those of the wider workforce and companies should disclose whether this is the case. 

ISS has also said that it will not, in 2020, issue a negative recommendation on a remuneration policy due to an existing pension arrangement with an incumbent director, but notes that companies with exceptionally generous arrangements should be aware of market sentiment and set out a clear plan to align pensions.  

ISS’s position is that companies should seek to achieve the required alignment over time but should note that UK investors may expect this to be achieved in the near-term.

2. Post-employment shareholdings 

Under the UK Corporate Governance Code, the remuneration committee must develop a formal policy for post-employment shareholding requirements, covering both vested and unvested shares. 

This policy should outline the required level and time period of any post-employment shareholdings, and be included in a revised remuneration policy.  

In its revised Principles of Remuneration (PDF) published in November 2019, the IA outlined its expectations in relation to post-employment shareholdings. 

The following are some key highlights : 

1. Shares should only count towards the shareholding requirement if vesting is not subject to further performance conditions.
2. Unvested shares not subject to further performance conditions can count towards the shareholding requirement on a net-of-tax basis (eg shares under a deferred bonus plan).
3. Post-employment shareholding requirements should apply for at least two years at a level equal to the lower of the shareholding requirement immediately prior to departure or the actual shareholding on departure.
4. The requirements should be established for all new and existing directors as soon as possible and, in any event, by the company’s next remuneration policy vote. 
5. The remuneration committee should state the structure/processes in place to ensure the requirements are maintained.  

In its Proxy Voting Guidelines for UK/Ireland (PDF), published in November 2019, ISS supports the IA’s guidance in relation to points 3 and 4 above.

3. Conflict of laws 

Issues can be caused where, for example, there are non-UK directors who are subject to collective bargaining arrangements or have other non-UK employment law rights.

Such arrangements or legal provisions may require payments to be made to individuals that (unless care has been taken to take those requirements into account when preparing the remuneration policy) are inconsistent with the policy.  

While the position is relatively clear where there is a conflict between UK statutory or contractual employment rights and the Companies Act requirements in respect of remuneration policies, it is much less clear how a conflict with non-UK requirements should be resolved.

Companies with directors who are employed outside the UK should therefore take care when preparing their remuneration policy to ensure that any applicable non-UK employment law rights are accurately reflected.

4. Employment rights 

You should ensure that your remuneration policy has flexibility to allow payments for loss of office to include sums to settle potential statutory claims (eg for discrimination or unfair dismissal). Otherwise, payments in relation to these disputes cannot be made, except potentially pursuant to a court/tribunal judgment. 

Any payment made outside your remuneration policy will be held on trust by the recipient, and the authorising directors can be pursued personally for any losses caused by the payment(s). 

5. Summaries of service contracts 

Where contracts are summarised in the remuneration report, you must ensure that these summaries are accurate. 

For example, it is common to comment that an executive’s payment-in-lieu-of-notice (PILON) clause in their service agreement is subject to mitigation, but this may not actually be the case under the service agreement.  

If such a conflict arises, it is fair to assume that the remuneration policy requirements would override the contract, given that payments can only be made in a way that is consistent with the remuneration policy. 

However, this could lead to an employee relations issue and a potential claim. 

6. Deferred bonus arrangements for leavers 

It is important that your remuneration policy and relevant deferred bonus plan rules are aligned. 

For example, your remuneration policy may state that a director who leaves employment will have all or part of their bonus deferred post-employment. 

If so, to avoid undermining your policy, you should:

• check that the rules of the deferred bonus plan allow for awards to be made when a director is no longer an employee; and 
• ensure that the rules don’t dictate that the award will vest immediately upon termination. 

7. Headroom for NED fees 

A remuneration policy will often outline a cap on total or individual non-executive director fees, and/or there may be restrictions in the company’s articles of association.

There should be flexibility to increase the overall cap/cap per director under both the remuneration policy and the articles, and the rules in these two sources should be consistent. 

8. Payment of legal fees on an executive’s exit 

The ability to pay the legal fees of a departing executive must be covered by your remuneration policy. 

Equally, you may wish to consider whether the policy should be broadened to cover legal fees in other circumstances (eg where employment law advice is required when you recruit a new director or for any reason during the course of the director’s employment).

9. Hiring arrangements 

It is important to ensure that your remuneration policy is flexible enough to allow remuneration packages to reflect the market norms in the jurisdiction where you are most likely to recruit.  

Aside from questions relating to pure quantum, you must ensure that there is flexibility to allow new recruits to continue to participate in standard arrangements outside the UK, such as a US retirement-savings plan.

If you wish to buy out existing awards at a new recruit’s current employer, you should ensure that the policy is flexible enough to allow this.

10. De minimis amounts

In the directors’ remuneration report, you are permitted to set a de minimis threshold for payments to directors. Payments under this figure do not have to be disclosed in the annual report. 

This de minimis threshold can be particularly useful in certain circumstances, for example where the company wishes to give a departing director a leaving gift.

Otherwise, assuming this gift was paid for by the company rather than the directors personally, this would have to be disclosed in the directors’ remuneration report.