July 2010

Executive Compensation Market Watch
- July 2010

Governance News

EC Green paper

Hard of the heels of the draft EC directive on capital requirements and remuneration in the financial services sector covered in last month’s Market Watch, the EC has published a consultation paper on:

(a) corporate governance in the FS sector
(b) remuneration in listed companies. Read More »

Stewardship Code

This code was published on 2 July. Read More »

Although investors will not be bound to adopt the code, those which do are encouraged to operate a ‘comply or explain’ basis. A list of investors which have said that they will abide by the code will be maintained by the FRC. The code sets out to cover the following main areas:

(a) the monitoring of investee companies
(b) the escalation of activities taken to protect or enhance shareholder value
(c) collective engagement
(d) voting policy
(e) managing conflicts of interest
(f) public reporting and reporting to clients.

Irish Stock Exchange consultation

A consultation paper has been published by the Irish Stock Exchange which proposes the introduction of an Irish Corporate Governance Code. Read More »

Reporting Season News

Voting recommendations

RREV and IVIS continue to apply close scrutiny to remuneration report and incentive plan votes.

Key issues highlighted in the past month include:

(a) base salary increases
(b) lack of performance target disclosure
(c) use of discretion
(d) level of threshold for payments under plans

We have also noted that some investor guidance has been reviewed following the provision of extra information by the companies.

Other News

Need for clarity on annual incentive schemes

The recent court case of GX Networks Ltd v Greenland highlights that employers should ensure that any discretionary cap on a bonus or sales commission plan is unambiguous, as in this case the lack of clarity in the plan went against the employer.
 

Stop Press

As this edition went to press, the Treasury published the consultation document on the proposed changes to pensions relief outlined in the 2010 Emergency Budget. Read More »

 

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EC Green Paper

This paper is essentially in two sections. The first covers corporate governance in financial services companies and addresses issues similar to those already addressed in the UK by the Walker Review. The second part covers directors’ remuneration in listed companies. This has arisen from concerns that the two non-binding EC Recommendations in this area (2004 on disclosure & shareholder vote and 2009 on termination payments) have not been applied at all by some member states and/ or have been applied inconsistently.

The green paper asks a variety of questions and sets out a number of statements on a range of topics including:

• The use of stock options
• Tax treatment for incentives
• Pay and risk
• Shareholder involvement in remuneration policy
• Severance

As the UK governance framework is one of the most developed in the EC, such consultations are generally not a high priority for UK companies as (assuming they comply with existing UK codes)  their existing framework/ practices already take into account key themes. The consultation period ends in September and a finalised report will be published following this.

 

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Stewardship Code

The full code can be found here.

 

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Irish Stock Exchange Consultation

The draft Code is based on the UK Corporate Governance Code (formerly the Combined Code) and includes some of the key recommendations of the report commissioned by the Irish Stock Exchange and the Irish Association of Investment Managers, published earlier in 2010 although several changes have subsequently been made.

The draft code seeks to encourage less focus on the use of ‘boiler-plate’ language and encourages companies to “..include explanations that more clearly reflect the environment within which they operate.” In particular companies intending not to implement a particular provision of the code should “..include a full and robust justification for its position.”

The thrust behind the changes appears to be to produce more meaningful reporting on processes and explanations for non-compliance. As a result the code is likely to be backed by investors. However a number of these provisions tend to duplicate or overlap with existing provisions and it will be interesting to see if the current drafting survives the consultation process.
The proposals do not include a recommendation that companies put the remuneration report to an advisory vote at the AGM although it may be that this will be covered by revisions to company law or the listing rules.

 

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Stop Press

As this edition went to press, the Treasury published the consultation document on the proposed changes to pensions relief outlined in the 2010 Emergency Budget. The clear thrust is that there will be no tax relief on pensions savings above a much reduced Annual Allowance.

The consultation period is very short, closing on 27 August 2010.  A decision on whether to implement the changes or stick with the previous government's plans will be made at the end of September 2010, to take effect in April 2011.

The full document can be found here:

http://www.hm-treasury.gov.uk/d/consult_pensionsrelief_discussion.pdf?UniqueValue=40400436582157250

Further details will follow in the next Towers Watson Executive Compensation Market Watch.