Each December, the Association of British Insurers (ABI) publishes any changes to its remuneration guidelines following a review earlier in the year.
This year, there are only a few amendments. The ABI has, however, made some interesting comments on the period over which Total Shareholder Return (TSR) performance tests should be measured. It has also for the first time suggested that companies specifically disclose how they propose to satisfy awards (eg through issuing shares, using employee trusts or treasury shares).
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Each December, the Association of British Insurers (ABI) publishes any changes to its remuneration guidelines following a review earlier in the year.
This year, there are only a few amendments. The ABI has, however, made some interesting comments on the period over which Total Shareholder Return (TSR) performance tests should be measured. It has also for the first time suggested that companies specifically disclose how they propose to satisfy awards (e.g. through issuing shares, using employee trusts or treasury shares).
Specific points to note on the changes this year include:
Pensions
Companies are increasingly offering cash supplements in lieu of pension arrangements. This was originally due to the earnings cap but is now due to "A-day" changes, which introduced further limitations on Revenue-approved pension benefits from 6 April 2006.
The ABI now say that these should be separately disclosed.
TSR
The ABI have said that they are concerned that the start and end points for TSR performance measurement are being averaged over periods which are too long.
Many long-term incentive plan (LTIP) awards and, to a lesser extent, share options have TSR performance targets. This is usually measured by reference to share prices at the beginning and end of a 3 year period (also taking account of dividends paid in between). Sudden spikes and falls in a company’s share price can occur at the beginning and end of the periods if a particular day is chosen. As this can result in artificial and unrepresentative start and end prices, companies often average their start and end share prices (and those of other companies in any comparator group for assessment of relative TSR performance of the company) by reference to average share prices over a period before the relevant date. Some companies do this over a one or 3 month period, but others do this over a six month or even 12 month period.
The ABI have said that "lengthy averaging periods should be avoided". They have not given any further clarification as to what too long a period might be but it is thought that this is only directed at companies with 12 month averaging periods.
Change of control
The guidelines re-emphasise that performance testing should determine the level of awards receivable on a change of control, and that time-vesting should be applied further to reduce the number of shares received if the change of control happens before the end of the intended performance period for an award.
An example of the effect of this would be that if, on a change of control, application of a performance test provided that 60% of the shares are receivable, but the change of control occurs half-way through the performance period, only 30% of shares would be received. This may not find support with many smaller companies, however, which still prefer to have Remuneration Committee discretion determining the number of shares receivable on a change of control.
Source of shares for plans
The ABI guidelines now provide for the first time that companies should explain how they intend to satisfy awards (eg through issuing shares or acquiring shares on the market and holding them in treasury or in employee trusts until needed by employees) as well as the acquisition and funding arrangements for this.
This is a development companies may not welcome. It could, if market practice follows the guidelines, lead to some quite onerous disclosure requirements without any apparent benefit to shareholders, as well as limiting companies’ flexibility if they wish to depart from what they have said.
This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq
Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.
The original publication date for this article was 10/12/2007.