Incentives legal update - April 2016

2016 update of the Pensions Investment Research Consultants (PIRC) shareholder voting guidelines

PIRC’s 2016 UK Shareholder Voting Guidelines contain the following key provisions:

• unless the Board of a company presents a clear, cogent and compelling case for disapplication of pre-emption rights of up to 10% of a company’s issued ordinary share capital, PIRC will not support proposals.
• PIRC recommends voting against future share buybacks, unless the Directors are not conflicted in making a clear, cogent and compelling recommendation that it would benefit long-term shareholders.
• PIRC recommends abstaining from the election of directors who sit on the remuneration committee who are also directors of another UK listed company.
• PIRC expects companies to report on polices to address gender inequality and their targets where it considers there to be evidence of gender imbalance at a board level and gender disparity in the workforce.

The European Banking Authority (EBA) report on the benchmarking of remuneration practices at an EU level and data on high-earners

As part of its ongoing role in benchmarking and monitoring remuneration trends, the EBA has published a report concerning the benchmarking of remuneration practices of staff who received €1m or more in 2014. Compared with the information provided by investment firms and credit institutions in 2013, the EBA found that:

• in 2014, the number of high earners meeting the €1m annual remuneration threshold increased by 22% in 2014
• the number of staff identified as material risk takers increased 84% in 2014
• further harmonisation of the supervisory framework for remuneration practices is required, particularly in respect of the application of payout, deferral and payment in instruments, and
• the average ratio of identified staff’s variable to fixed valuation fell from 104.27% & to 65.5%.

Prudential Regulation Authority (PRA) consultation on Solvency II remuneration requirements

The Office of Tax Simplification (OTS) published its report exploring the possibility of a closer alignment of income tax and NICs, through the alignment of how NICs operate more closely with income tax. The OTS confirmed that the two regimes will not be combined at this stage. The report discusses the main differences between NICs and income tax, a number of issues with NICs and the key steps to achieving alignment of the two systems.

First-tier Tribunal denies entrepreneurs' relief as deferred shares included in ordinary share capital

The PRA issued a consultation paper on its draft supervisory statement on Solvency II remuneration requirements.

From 01 January 2016, the remuneration requirements in the Solvency II Regulation became directly applicable to UK insurance and reinsurance firms and groups which fall within the scope of the Solvency II Directive.

The draft supervisory statement clarifies the PRA’s expectations of how Solvency II firms should comply with Article 275 of the Solvency II Regulation, and in particular performance measurement, deferral and the identification of Solvency II staff.

The FCA will also monitor firms' remuneration policies, practices and whether any specific conduct issues may impact upon firms' remuneration decisions.

Further details of the consultation can be found here.

London Stock Exchange (LSE) consultation on changes to AIM Rules

The LSE has issued a consultation concerning proposed changes to the AIM Rules for Companies prior to the entry into force of the Market Abuse Regulation.

The key changes being consulted on are:

• replacing AIM Rule 21 with a new rule that will require AIM companies to have an effective and reasonable dealing policy in place from admission, and to update their existing policies by 03 July 2016 to comply with the new rule, and
• deleting the requirement in AIM Rule 17 for an AIM company to notify, without delay, information concerning directors’ dealing because this is now covered by Article 19 of the Market Abuse Regulation.

HM Revenue & Customs (HMRC) consultation on share scheme employer NICs elections

HMRC has issued a consultation on whether companies with non tax-advantaged share schemes require the continued availability of a NIC joint election. It is generally illegal to transfer employer NICs, with the exception of certain chargeable events relating to employment-related securities or options.

A NICs transfer can be structured as:

• An agreement - under which the employee agrees to indemnify the employer and the NICs liabilities remain with the employer. An agreement does not need to be approved by HMRC and it can be informal, or
• A joint election - under which the NICs liabilities transfer from the employer to the employee. However, the employer is responsible for collecting and paying the NICs to HMRC in practice. An election must be approved by HMRC in advance.

HMRC is considering abolishing joint elections as part of its digital strategy because they are no longer required to overcome the accounting issues they were intended to deal with when they were introduced in 2000.

Executive Remuneration Working Group (ERWG) publishes its interim report

The Investment Association’s (ERWG) was established in Autumn 2015 to review the structure of listed companies’ executive rewards. The ERWG’s final recommendations may be adopted by the Investment Association in its principles of remuneration.

In its interim report, the ERWG recommends that the current remuneration model should be reconsidered and companies should consider alternative structures that are aligned to the interests of shareholders and the company’s long term strategy and CSR.

For instance, listed companies should not simply provide long-term incentive plans (LTIPs) because they are viewed as standard market practice. The ERWG suggests that the following alternatives should be considered:

• annual grants of restricted shares
• awards based on historic performance, that vest over a three to five year period, without any further performance conditions applying, and
• deferring bonuses into shares that vest over a significant period of time.

If the ERWG’s alternatives are adopted by the Investment Association, the proposals listed above could have a significant impact on executive pay structures.