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UK Corporate Governance Code principles and provisions on remuneration -…
UK Corporate Governance Code principles and provisions on remuneration
No director should be involved in deciding their own remuneration outcome
In order to avoid directors deciding their own remuneration outcome, this principle provides that a formal and transparent procedure for developing policy on executive remuneration and determining director and senior management remuneration should be established
Levels of remuneration
Remuneration policies and practices should be designed to support strategy and promote long term sustainable success
Executive remuneration should be aligned to company purpose and values and be clearly linked to the successful delivery of the company's long term strategy
FRC guidance cautions against designing pay structures based solely on benchmarking to the market or the advice of remuneration consultants, as there is a risk as this encourage an upward ratcheting effect on executive pay
Directors should exercise independent judgement and discretion when authorising remuneration outcomes taking account of company and individual performance and wider circumstances
The remuneration committee should review workforce remuneration and related policies and the alignment of incentives and rewards with future, taking these into account when setting the policy for executive director remuneration
Pension contribution rates for executive director should be aligned with those available to the workforce. Several listed companies came under pressure from institutional investors to comply with this recommendation in 2019
Independent judgement should be exercised when evaluating the advice of external third parties and when receiving views from executive directors and senior management
Levels of remuneration for the chair and all NEDs should reflect the time commitment and responsibilities of the role. Remuneration for all NEDs should reflect the time commitment and responsibilities of the role. Remuneration for all NEDs should not include share options or other performance related elements
Performance related remuneration
The Code requires executive remuneration to be aligned to the company purpose and values and to be clearly linked to the successful delivery of the company's long term strategy
The Code requires the remuneration committee to review and take into account workforce remuneration and related policies and the alignment of incentives and rewards with culture for these purposes
Remuneration schemes should promote long term shareholdings by executive directors that support alignment with long term shareholder interests
Share awards granted for this purpose should be released for sale on a phased basis and eb subject to a total vesting and holding period of 5 years or more
The remuneration committee should develop a formal policy for post-employment shareholding requirements encompassing both vested and unvested shares
Remuneration schemes and policies should enable the use of discretion to override formulaic outcomes
They should also include provisions that would enable the company to recover and/or withhold sums or share awards and specify the purposes in which it would be appropriate to do so
The use of discretion is intended to help avoid situations where directors may be unjisifably rewarded for performance improvements that are completely out of their control, eg oil production companies
Malus and clawback provisions enable icnentive payments to be withheld or clawed back in light of subsequent events
Only basic salary should be pensionable
Directors should not be rewarded for failure by limiting notice and contract periods and by requiring companies to be robust in reducing compensation to reflect departing directors obligations to mitigate loss
When determining executive director remuneration policy and practices, the remuneration committee should address the following
Clarity
Remuneration arrangements should be transparent and promote effective engagement with shareholders and the workforce
Simplicity
Remuneration structure should avoid complexity and their rationale and operation should be easy to understand
Risk
Remuneration arrangements should ensure reputational and other risks from excessive rewards and behavioural risks that can arise from target based incentive plans are identified and mitigated
Predictability
The range of possible values of rewards to individual directors and any other limits or discretions should be identified and explained at the time of approving the policy
Proportionality
The link between individual awards, the devilry of strategy and the long term performance of the company should be clear. Outcomes should not reward poor performance
Alignment to culture
Incentive schemes should drive behaviours consistent with company purpose, values and strategy