New ABI Guidelines on Executive Pay Published

The Association of British Insurers (“ABI”) has published updated guidelines on the structure of executive pay. The new “ABI Principles of Remuneration” are the first substantial update of the ABI guidelines since 2007. Although the guidelines are intended to be applied to companies listed on the Main Market of the London Stock Exchange, AIM companies will look to the guidelines as an indicator of best practice.

Many of the existing guidelines remain unchanged. This includes the 10% dilution limit on the use of newly issued shares for the purpose of employee share schemes and the 5% dilution on the limit of newly issued shares for executive (discretionary) schemes. However, the new guidelines omit the previous provision which allowed small companies to apply a 10% limit to discretionary schemes within certain levels. Many companies which consider themselves to be “small” even though they may not meet the strict test in the guidelines have, in the past, relied on this wider limit to justify incorporating a higher dilution limit within their discretionary schemes and it remains to be seen what effect this omission will have in future.

At a time when levels of executive pay are under the public spotlight, the new guidelines unsurprisingly focus on ensuring that levels of executive pay are appropriate, performance conditions are challenging, there is no “reward for failure” and the use of clawback.

Key features of the new guidelines include:

• Companies should adopt a careful balance between fixed and variable pay, with a high degree of deferral and performance measurements over the long term. Executive pay should be viewed in terms of the company’s pay policy as a whole.
• Increases in base salary should be fully disclosed and justified to shareholders. When using benchmarking to determine executive pay, companies should apply comparators on a fair and reasonable basis and not merely “chase the median”.
• Annual bonuses should be a reward for contributions above the level expected for receiving salary. Annual bonuses should be cancelled if the business has suffered an “exceptional negative event”, even if some targets have been met.
• Performance measurements should focus on the long term business objectives of the company, should be fully disclosed and justified.
• Shareholders should expect to see clawback or malus contained in executive remuneration arrangements and for such provisions to be enforced when appropriate.
• The remuneration committee should consider determining or overseeing remuneration at below board level, particularly where levels of remuneration and/or risk are material to the company’s overall performance.

A copy of the new guidelines is available here