Carol Arrowsmith, partner in the remuneration team at Deloitte, says: “We are pleased to see the ABI taking a different stance by adopting a principles-based approach. This represents a significant change from the previous guidelines, focusing attention on the issues of greatest concern to shareholders.
“We believe over time this will improve communication and trust between companies and their shareholders. Companies find it frustrating when shareholders lose sight of the overall aims of the remuneration policy because one aspect does not ‘fit’ against every guideline. We hope the guidelines will give shareholders the confidence to use their votes on the basis of a better understanding of the remuneration policies. Of course, companies must also do their part by providing good quality explanation and discussion of the rationale behind remuneration structures and particular decisions, but will be encouraged to do this if shareholders focus more on the remuneration policy and structure as a whole.
“This approach aligns with the proposed changes to disclosure requirements, published recently by the Department for Business, Skills and Innovation, which will see the introduction of a Strategic Report to provide investors with clear and concise disclosure of the company’s business model, strategy and risk, and the links between company performance and the remuneration of company directors and senior executives.”
For the first time the new principles contain guidance on quantum, the importance of ensuring remuneration is determined within the context of the pay policy of the company as whole and the dangers of salary benchmarking.
Arrowsmith comments: “We support the recommendation that remuneration committees should determine remuneration for executive directors in the context of the wider employee population. We consider this to be particularly important when looking at salary increases where we believe committees should avoid falling back into the cycle of increasing directors’ salaries at an ‘executive’ rate.
“We particularly welcome the guidance on benchmarking and the importance of making sure that any comparisons are made on a fair and reasonable basis. Remuneration committees should ensure comparator groups are chosen with care and should use benchmarking data responsibly. We encourage committees to avoid chasing the median and to recognise that being within the market range represents competitive pay.”
Guidance is included on the structure and disclosure of annual bonus, specifically stating that annual bonuses should only exist to reward contribution to the business strategy above the level expected for being in receipt of a salary.
Arrowsmith says: “Over the past decade, while potential bonus payments have more than doubled, the median payout has consistently been between 70% and 80% of the maximum and we are not surprised that shareholders are focusing on this area. We hope the disclosure of measures and targets, and particularly the disclosure of the extent to which relevant targets were met, will encourage committees to ensure that targets are set in the expectation no bonus will be paid unless company performance warrants it and any payout above target requires significantly better than ‘good’ performance.”
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