Principles of remuneration

Vicki Aston

Vicki Aston, Director, Corporate Services

13 March 2019

This briefing note was prepared by Vicki AstonDirector, Corporate Services and Kim LuceAssociate Director, Corporate Services.

The UK Code and corporate nominee services

The UK Corporate Governance Code 2018 published in July 2018 introduced updated principles of remuneration with the aim of addressing attention from the public, media and investors. The Investment Association (IA) subsequently published updates to its Principles of Remuneration in advance of the 2019 AGM season. The Code applies to accounting periods beginning on or after 1 January 2019. All companies with a Premium Listing of equity shares in the UK are required under the Listing Rules to detail in their annual report how they have complied with the remuneration principles in the updated Code. Companies will therefore need to implement changes to remuneration policies, plan rules and award documentation in 2019 if they are to be compliant for the full year in readiness for annual reporting from 2020.

Build Up Executive Shareholdings

Under the new guidelines, executives are expected build up significant holdings of shares in their company. The minimum shareholdings set by the Remuneration Committee should also detail the duration over which shareholdings are to be achieved. Types of share awards that count towards minimum requirements include vested shares which are not subject to performance conditions, and awards on a net-of-tax basis. Shares which are vested, but subject to a holding period and/or clawback, may also count towards the shareholdings requirement. Committees should set out any consequences of not meeting the minimum.

Post-Vesting Shareholding Requirements

Executives should continue to hold shares post-vesting for at least two years, at a level set by the Committee. This should apply to all shares the executive hold at the time of leaving or, if lower, the number of shares the executive was required to hold immediately before vesting. Investors expect companies to implement ways to facilitate such continued holding at the earliest opportunity and at a minimum by the Company’s next vote on Remuneration Policy. Therefore, structures such as trust and nominee arrangements, should be put in place to ensure that such post-employment shareholdings are maintained.

Malus and Clawback

Remuneration incentives should allow for

  • Forfeiture of all or part of an award or bonus before it has vested and been paid (“Performance Adjustment or Malus”); and/or
  • Recovery of sums already paid (“Clawback”)

The circumstances under which these provisions are triggered should be agreed before awards are made, and must be clearly set out and be disclosable to shareholders. In order to be able to enforce these provisions, expectations must be set at grant with specific terms and conditions relating to malus and clawback being agreed and approved on acceptance. Remuneration documentation, contracts of employment, plan and award communications and rules should all be consistent and adjusted to facilitate and ensure compliance.

Compliance with the Code and IA Principles | A corporate nominee facility

An employer-funded corporate nominee facility that sits within an Employee Benefit Trust (EBT) as the vehicle provides companies and their executives with a cost-effective straightforward solution to compliance with the above principles.

  • PLCs (or companies with a premium listed parent) looking to implement a corporate nominee facility can do so through their existing EBT.
  • For PLCs without an EBT, a new EBT can be set up through which the nominee facility can be operated.

How does the EBT nominee pairing work?

Post-Vesting Shareholding Requirements

Under this ‘trustee/nominee’ arrangement, the trustee continues to hold post vested, restricted shares that are subject to a further holding period or might be subject to clawback provisions post vesting. In these circumstances, the trustee acts in a bare trustee or nominee capacity: whilst the beneficial interest passes to the participant on vesting, the trustee (as nominee) retains legal ownership. This allows participants to benefit from any dividends, voting or other rights they are entitled to, however, should some or all these shares be forfeited during that period, the shares can be clawed-back easily: the nominee returns the shares to the trustee. These shares then become unallocated assets in the EBT to be recycled for future use at the trustee’s discretion. In addition, there may be administrative efficiencies in continuing to hold the shares offshore, especially for non-UK or globally mobile employees.

Continued Holding of Shares after the Holding Period

In the event that shares are not forfeited at the time when the participant comes out of the post-vesting holding period, the Company may wish to encourage continued holding of shares by allowing participants to remain in the nominee facility. This is an extension of the above employer-funded service, which we see many employers seeking to offer employees or ex-employees to promote share ownership post-employment. Implementing this nominee platform offers the participant a cost effective brokerage/custody service at corporate rates offering exemptions to the standard KYC/CDD process. Not only is this helpful for domestic employees, it becomes extremely effective for overseas employees for whom setting up personal custody and brokerage accounts can be onerous and expensive.

All-Employee Nominee Service

Depending on the appetite of the Company, the nominee service can be extended to incorporate all employees with post vested shares, whether subject to further restrictions or not.

Establishment, Documentation & Ongoing Services

For clients with an existing EBT with SANNE, there is no need to set up a separate trust arrangement with SANNE as a service provider – the trustee provides the additional service as trustee of the EBT but acting in a bare trustee capacity. For potential clients with no existing relationship with SANNE, you will first need to set up an EBT through which the nominee facility will operate. This is standard practice and acceptable from a regulatory and AML/compliance perspective. There is also no need for the trustee to individually verify each nominee shareholder from a KYC perspective due to exemptions afforded to the trustee in respect of AML regulation as long as all the shares comprised in the account derive from an employer funded share plan. To facilitate the nominee holding, the trustee sets up a secondary account with its broker and holds ‘nominee’ shares under a separate dividend bearing mandate.

On vesting, the Company communicates the proposed arrangements to the relevant participants. The balance vested shares after tax then automatically tip into the nominee account. Standard nominee terms will be implemented by the Trustee and beneficiaries must adhere to the terms to participate in the facility. The nominee maintains a record of participants and allocates dividends according to holdings.  We can also canvass voting preferences where required.  Both services can be done by the trustee alone or alongside existing Plan Administrators via a share plan portal.

When a participant wishes to exit the facility, they notify us, we sell or transfer by CREST or certificate as and when required.  Exit from the nominee facility can also be ‘forced’ under the nominee terms under certain circumstances, such as within three months of the date of an employees’ termination of employment. The nominee will be required to undertake FATCA/CRS regulatory reporting on FATCA/CRS or equivalent on the underlying nominee holdings.

How can SANNE assist?

SANNE can provide the full range of services to comply with the obligations under the Law:

  • Act as Corporate Trustee and/or Corporate Nominee to hold Shares
    • Subject to Post-Vesting Holding Periods
    • To encourage a Build-up of Executive Shareholdings
    • To provide a facility by which all employees can build up an electronic holding of Shares
  • Undertake regulatory reporting – FATCA/CRS
  • Canvass voting preferences of shareholders under the Nominee Arrangement
  • Management and payment of Dividends under the Nominee Arrangement

For further information about SANNE’s trustee and nominee services and how these promote best practice and compliance with remuneration policy guidelines, please feel free to contact:

Vicki Aston, Director, Corporate Services and Kim Luce, Associate Director, Corporate Services.

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