10 October 2014
FTSE 250 companies need to update their remuneration arrangements in order to comply with updated UK Corporate Governance Code, according to a report by Deloitte.
The Financial Reporting Council’s UK Corporate Governance Code now includes a provision that companies should have both the ability to be able to recover sums paid and to withhold the payment of any sum.
Mitul Shah, partner in the remuneration team at Deloitte, comments that the FRC announcement emphasises the need for both malus and clawback provisions and that ‘an increase in the number of provisions in place’ has been seen but ‘in many cases these allow for the use of malus only’.
The report found that an estimated nine out of ten FTSE 250 companies need to introduce or extend their measures for malus (withholding payments) and clawback (recovering sums paid).
‘Companies will need to start planning for this as soon as possible as there are a number of complexities involved in implementing these policies’, Shah added.
It is not all doom and gloom, as an additional 25% more companies now include provisions in their remuneration policy regarding malus and clawback – up to 83% this year, from 58% in 2013.
According to Deloitte’s report, bonus payouts for performance in 2013 were lower than 2012, with a median payout of 67% of the maximum opportunity – the median payout was 69% in 2013 and 75% in 2012. No payouts were made in 11% of companies, which is higher than the previous two years respectively, when 10% and 8% of companies did not pay out any bonuses.
Another key change this year, identified by Deloitte, is the doubling of the number of incentive plans where the period before an executive receives their shares extends beyond the usual three years. Over a fifth of performance share plans incorporate a longer time period. In 18% of plans, there is a further holding period for at least part of the award. However, only 5% of plans measure performance over a period longer than three years.
Shah commented: ‘In the current economic environment there is growing pressure for incentive plans to focus on long term stewardship and companies have responded to this in a number of ways.
‘For example, by introducing a holding period after the performance period has ended. In FTSE 250 companies it is more likely that some of the shares will be released at the end of the three year performance period, with the remainder released after one year or in tranches over a two or three year period. In FTSE 100 companies however, it is becoming increasingly common for there to be a five year period before any shares are released.’
Deloitte’s 2014 report on remuneration in FTSE 250 companies has found that more than three quarters – 76% – of FTSE 250 companies have made changes to their remuneration arrangements in the last 12 months.