Board pay is always in the headlines and 2016 will be no exception. The Investment Association (representing large institutional investors) has established an Executive Remuneration Working Group and is expected to publish its proposals for a radical simplification of executive pay in the spring of 2016, in time for companies to put their pay policies to shareholders in 2017.
This follows concerns by investors, companies and executives that board pay is becoming too complex. Alex Beidas, Linklaters Employment & Incentives partner, says:“It will be interesting to see what the focus of the working group will be. Is quantum the issue or the perceived lack of connection between pay and performance? They face a difficult task.” Meanwhile, the revised Shareholders’ Rights Directive (with ‘say on pay’ rules and greater disclosure for all EU companies similar to those we already have in the UK) is expected to be finalised in the first part of 2016. It remains to be seen how the member states and the European Parliament will resolve their differences over some key issues. For example, whether there should be a shareholders vote on the remuneration report or just a discussion at the general meeting, and whether pay policy should be voted on every three or five years.
Significantly, the European Parliament has included some controversial provisions requiring that the value of shares should not play a dominant role in any financial performance criteria and that share-based remuneration should not represent the most significant part of variable pay. But both the Parliament and the member states have removed the Commission’s proposal for companies to include in their pay policy the envisaged ratio between director and employee pay. And both agree that their policy vote may be advisory rather than binding on the company, thus depriving the measure of any real teeth. Gillian Chapman, Linklaters Employment & Incentives Partner, says: “The EU has considerably watered down the original proposals and so moved further away from the UK model which requires a binding vote on board pay. This goes against the Commission’s stated aim of harmonised rules across the EU; we are unlikely to have a level playing field for directors’ pay policy and disclosure across the EU.”
EU-wide rules on market abuse and insider dealing are coming into force on 3 July 2016. The new rules will have direct effect in the UK and are an example of EU laws directly overriding UK legislation. Companies will have to amend their internal codes. Over the last few years, the number of insider dealing cases brought by the regulator has increased significantly. It remains to be seen if this will continue under the new regime. Rasmus Berglund, Linklaters Employment & Incentives Lawyer, says: “There is little room for the UK to adapt the rules to apply in the UK and the new EU market abuse rules will sweep away much of our existing regime. All the Financial Conduct Authority can do is offer guidance on how to implement the rules.”
Financial sector pay
All eyes were on perceived excesses in bankers’ pay after the financial crisis. Soon after, the Financial Stability Board (FSB) issued recommendations (including on pay) on strengthening the financial system, later endorsed by the G20. In its recent progress report on this, the FSB is generally positive about the measures taken by G20 countries. There is no doubt that the level of supervision and regulation has vastly increased, and more is to come in 2016: The FSB will review bonus reform including provisions to withhold or reclaim variable pay, to see whether they are sufficiently developed and effectively used to deter conduct risks. It may make recommendations to the G20 on further reforms.
The European Banking Authority will publish its final Guidelines on Remuneration following the consultation in March 2015. These cover a wide range of topics, including allowances, guaranteed/buy-out bonuses, withholding/reclaiming variable pay and disclosure. The main issue coming out of the consultation was that the banks and investment firms which have to date been able to dis-apply the bonus cap (the limit of 1x or 2x salary for variable pay), for proportionality reasons, may no longer be able to do so. However, recent indications are that there may be some leniency on this in the final Guidelines. The European Commission will report on its review of the impact of the bonus cap, and the efficiency of the other remuneration rules by 30 June 2016.
Alex Beidas, Linklaters Employment & Incentives partner, says: “The financial sector has had to implement compensation governance, structure and disclosure measures under increased regulation. The Senior Managers Regime, which comes into force on 7 March, is a further example of the increased focus of the regulators on direct accountability in the sector by those performing senior management functions. It remains to be seen whether this will lead to better risk management controls.”