News Flash

Glass Lewis - 2024 UK Benchmark Policy Guidelines Published

Glass Lewis has published it’s 2024 UK Benchmark Policy Guidelines which will inform its proxy voting policies on numerous matters all of which will have effect from general meetings held on and after 1 January 2024. 

This CORPGRO newsflash relates only to changes related to executive compensation and share plans such as LTIP and Directors’ Share Ownership Guidelines.

The 2024 policy guideline document is broadly similar to 2023, but there are some important additions and changes in emphasis. A link to the full document can be found here.

The main points, with CORPGRO comments are below:

1. Compensation quantum 

Any increase in compensation quantum, fixed or variable, needs sufficient justification, including inflationary adjustments.

Previously, justification was expected for significant increases only.

CORPGRO comment:

This seemingly slight change of emphasis is significant.

First, it reflects the general investor desire to hold back the rise in top pay, and that companies should not slavishly follow the market.

Second, that directors’ base salary rises must undershoot those of the workforce generally.

Insightful, detailed company disclosures will be needed to explain any increase, and boiler plate rationale is likely to be challenged.

2. Pension alignment 

The 2024 guideline wording on directors pension provision alignment with the wider workforce has moved from an expectation to a requirement. Non-compliance increasingly risks a vote against recommendation.

CORPGRO comment:

Pension alignment is largely now complete, but a few companies still choose to explain their reasons. Glass Lewis is aligned fully with broad investor views. As legacy pension positions age and expire, we can expect a strong push to full compliance to follow shortly.

3. New vote against issues 

New potential vote against recommendations for policy or remuneration report are:

• remuneration policy, a significant policy softening without well disclosed justification

• cash or LTIPs awarded to NEDs, on similar terms to executives

• poorly addressed shareholder dissent on remuneration practices

• non-justified, lowering of performance targets

CORPGRO comment:

These new guideline items are in practice, not new. Each of them will have already triggered much shareholder and proxy concern, and dissent

Interestingly, the NED incentive comment focuses concern on participation in similar incentives to executives, rather than a total prohibition; as flagged by the UK corporate governance code part five, paragraph 34. among other objectors.

4. LTIP shareholding

Director share ownership guidelines for in post and post-employment are already a feature of the Glass Lewis guidelines landscape. The new expectation is that the shareholding should be achieved within a limited number of years.

CORPGRO comment:

In practice most company SOGs permit a five-year “ ramp-up” acquisition period to achieve compliance. The absolute shareholding requirement should mirror equity availability within the package. This incremental extra requirement seems minor.

5. LTIP design

The guidelines say that a well framed LTIP should reflect: 

• no retesting or lowering of performance conditions, post grant

•  two or more performance metrics 

• with one relative performance metric, against a peer group or index, such as TSR

• apply stretching targets to drive outstanding performance

•  LTIP personal limits should be set as a percentage of base pay 

CORPGRO Comment:

The desire to see more than one LTIP metric and a mix of absolute and relative performance stems from a wish to reward rounded management performance, but also to deter potential management manipulation of results.

6. Major shareholding and compensation

The LTIP provision for executives with major personal shareholdings (10-20%) will be examined closely.

Investor concerns may be eased where:

• challenging targets with diverse performance metrics are set

• shareholder feedback on this matter is disclosed

• the shareholder will abstain on the relevant proposal, and

• a commitment is made to take into account any shareholder dissent

Corpgro, comment:

Founder directors, or directors of an unwinding MBO, may continue to hold significant amounts of equity post IPO. If the executive continues to have a high value contribution to ongoing success, full market pay seems appropriate.

But where this is not the case, then concerns regarding both that director’s role and total package overall might be a better focus for the board and investors than the provision of LTIP alone.

7. Pay comparator company disclosure

The 2024 Glass Lewis guidance encourages disclosure of the company pay comparator selection and decision process, and the individual comparator companies selected for setting executive compensation. The company should justify where this process diverges from prevailing market practice in the main reference country.

Corpgro comments:

Comparator companies drive much of the decision-making on executive compensation quantum, pay mix, metric selection, and weighting. Detailed disclosures of this kind of common in the USA. However, the number of companies and the data availability in the USA is very deep. All companies should, however, be able to justify to shareholders and others a detailed and well thought through selection process and decision-making protocol.

8. Financial services: Bonus cap removal

Glass Lewis expects that financial services companies shall balance any increased incentive opportunity against an appropriate lower amount of fixed compensation. Financial services companies can from 31 October 2023, remove the cap on variable pay, following the FCA and the PRA announced removal of the banker’s bonus cap.

Corpgro comment:

The banker’s bonus cap was introduced across Europe following the 2008 global financial meltdown. Many financial services companies rebalanced the package so that fixed pay increased with the result that variable pay remained within the 200% limit, with no overall change in amount.

Many financial services companies will now seek to decompress this artificial constraint by reversal of the process. This entails lowering fixed pay and increasing variable pay, on a no win, no lose basis. Unsurprisingly, this exercise and outcome will attract close investor attention.

WE WECLOME YOUR THOUGHTS
CORGRO will gladly assist is you have questions or issues arising from this development. We would be glad to hear from you.

Executive Compensation and Incentive Design

Reward and Share Plans 

Remuneration Advisory and Support

ESG and Sustainability

Please feel free to email or call:

Damian Carnell - [email protected] +44 (0) 7989 337118

VA Bec Bostock - [email protected]

Please share this CORPGRO information with your board or your colleagues.