FTSE 250 companies need to update their remuneration arrangements to comply with updated UK Corporate Governance Code

• 76% of companies have made changes to their remuneration arrangements
  
• An estimated nine out of ten FTSE 250 companies will need to introduce or extend malus and clawback measures*;
  
• Doubling of the number of incentive plans where the period before an executive receives their shares extends beyond the usual three years.

More than three quarters (76%) of FTSE 250 companies have made changes to their remuneration arrangements in the last twelve months according to a new report by Deloitte, the business advisory firm

The most significant change is that an additional 25% more companies now include provisions in their remuneration policy to withhold payments (“malus”) or recover sums paid (clawback)** in certain circumstances – up to 83% this year, from 58% in 2013. However, the release in September of an updated UK Corporate Governance Code from the Financial Reporting Council means this is likely to be the biggest area of focus over the coming year ***.

Mitul Shah, partner in the remuneration team at Deloitte, comments:  “The recent FRC announcement emphasises the need for companies to be able to apply both malus and clawback to all forms of variable pay. Although we have seen an increase in the number of provisions in place, in many cases these allow for the use of malus only.

“Around nine out of ten companies will need to either extend current provisions or introduce new arrangements to comply with the revised code. Companies will need to start planning for this as soon as possible as there are a number of complexities involved in implementing these policies.”

Incentive plans with longer time periods

Another key change this year is the doubling of the number of incentive plans where the period before an executive receives their shares extends beyond the usual three years. Over a fifth of performance share plans incorporate a longer time period. In 18% of plans there is a further holding period for at least part of the award. However, only 5% of plans measure performance over a period longer than three years.

Shah adds: “In the current economic environment there is growing pressure for incentive plans to focus on long term stewardship and companies have responded to this in a number of ways. For example, by introducing a holding period after the performance period has ended. In FTSE 250 companies it is more likely that some of the shares will be released at the end of the three year performance period, with the remainder released after one year or in tranches over a two or three year period. In FTSE 100 companies however, it is becoming increasingly common for there to be a five year period before any shares are released.”

Shareholding requirement

There has been a further increase in the number of companies requiring directors to hold shares. Further, almost 10% of companies have increased the minimum number of shares to be held.

Shah states: “Another way for remuneration policies to encourage long term stewardship is to require directors to hold a certain number of shares, usually specified as a multiple of salary. 85% of companies now have requirements in place and although the median requirement is still one times salary, there are almost 40% of companies where the requirements are in excess of this and we expect this trend to continue over the next year.”

Voting

Shah adds: “The remuneration policy may potentially be in place for three years without needing further shareholder approval and our research suggests that many companies have taken the opportunity to review aspects of the policy and to renew incentive plans due to expire in the next couple of years. Shareholders have generally been supportive of these changes but it is worth noting that there have still been a number of issues causing concern, notably around the recruitment policy.”

Salaries

FTSE 250 companies are demonstrating pay restraint and showing a strong link with performance. Salaries remain at 2013 levels for around a quarter of CEOs and a third of all top executive directors. The median increase for 2014 is 2.5%, slightly lower than in 2013.

Link with performance

Bonus payouts for performance in 2013 are lower than 2012, with a median payout of 67% of the maximum opportunity, **** the median payout was 69% in 2013 and 75% in 2012. 11% of companies made no payouts, higher than the previous two years respectively, 10% and 8%. For long term incentive awards which paid out in 2013 the level of the payout varied with full vesting in around a quarter of companies and zero vesting in a further quarter of companies.

End

Notes to editors

* This is an estimate, due to a lack of visibility of existing arrangements.

** ‘Real’ clawback requires the recovery of bonuses already paid, or the value of shares already awarded and potentially sold by a participant. This is distinct from malus, which means that any award of shares which have not yet been released to an individual can be reduced in situations such as a misstatement of results or gross misconduct. These provisions are now in place in around 80% of companies.

*** The Financial Reporting Council’s UK Corporate Governance Code now includes a provision that companies should have both the ability to be able to recover sums paid and to withhold the payment of any sum.

**** There is a maximum bonus opportunity based on company performance. Depending on the extent to which the performance targets are met a proportion of the bonus will be paid, up the maximum for outstanding/exceptional performance.

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