Guidance for Remuneration Committees
The following guidance is set out to help Remuneration Committees apply the ABI
Principles of Remuneration and ensure a proper level of shareholder protection.
SECTION A – GENERAL GUIDANCE
Quantum of remuneration is a matter of concern to shareholders. Levels of pay that
do not reflect corporate performance undermine the ability to reward success and
represent excess rent extractions. Undeserved remuneration undermines the efficient
operation of the company. Excessive remuneration adversely affects its reputation
and is not aligned with shareholder interests. Shareholders are likely to object
to levels of pay that do not respect the core principles of paying no more than
is necessary and a linkage to sustainable long-term value creation.
Companies must consider the aggregate impact of employee remuneration on the finances
of the company, its investment and capital needs, and dividends to shareholders.
The Remuneration Committee should seek specific points of reference against which
the appropriateness of quantum can be judged. Useful reference points, which should
help avoid unnecessary disagreements with shareholders, include:
- A stated policy that links aggregate remuneration to overall
corporate performance. High pay for exceptional performance is consistent with this
- The remuneration policy of the company as a whole. Remuneration
Committees should assess the appropriateness of changes in the quantum of executive
remuneration in the context of the company overall, including changes in employee
remuneration more broadly.
- A relevant and fairly constructed peer universe. It is
undesirable simply to use “median” pay as a benchmark since this, if used broadly,
can lead to ratcheted increases in remuneration.
2) Executive shareholdings
Executive directors and senior executives should build up significant shareholdings
in companies. Unvested share based incentives should not be allowed to count towards
the holding requirements and these requirements are not a substitute for performance
metrics under share based plans. Shares should only count towards the executive’s
shareholding guideline if they are completely unfettered. The use of shareholdings
in hedging arrangements or as collateral for loans should be fully disclosed. Shares
which are subject to future performance, holding periods, claw-back or shareholding
guidelines should not be hedged or used as collateral.
3) Non-executive shareholding
Shareholders encourage non-executive directors to own shares in the company. Chairmen
and non-executives may receive part of their fees in shares bought at the market
price. However, shareholders consider it inappropriate for chairmen and independent
directors to receive incentive awards geared to the share price or corporate performance.
Discretion can help Remuneration Committees to ensure that the outcomes of executive
pay schemes properly reflect overall corporate performance and the experience of
the shareholders in terms of value creation.
Discretion should be exercised diligently and in a manner that is aligned with shareholders’
interests. Discretion should only be exercised within the previously agreed boundaries
and maxima. If these are exceeded, then shareholders will consider excessive payments
to be ex gratia in nature.
The use of discretion should be clearly disclosed. Remuneration Committees will
be held accountable for the way discretion is used.
5) Pay for employees below board level
The Remuneration Committee should be cognisant of pay and conditions elsewhere in
the Group and take them into account when determining executive remuneration.
The Committee may have a role in determining pay or having oversight of remuneration
at below board level. This is of particular relevance where the levels of remuneration
or the risks associated with the activities involved are material to the Group’s
Remuneration committees should not seek to make changes to any element of executive
remuneration to compensate participants for changes in their personal tax status.
Remuneration structures that seek to increase tax efficiency should not result in
additional costs to the company or an increase in its own tax bill. Remuneration
Committees should be aware of the potential damage to the company’s and shareholders’
reputation from implementing such schemes.
7) Contracts and severance
Companies should follow the Principles and Guidance contained within the ABI and
NAPF Statement on Executive Contracts and Severance and the UK Corporate Governance
Code. The Statement is available at:
8) Recruitment of executive directors
When recruiting Executive Directors, companies should pay no more than is necessary
and should fully justify payments to shareholders. Compensating executives for the
forfeiture of awards from a previous employer should generally be on a comparable
basis, taking account of performance achieved or likely to be achieved, the proportion
of performance period remaining and the form of the award.
9) Reward for Failure
It is unacceptable that poor performance by senior executives, which detracts from
the value of an enterprise and threatens the livelihood of employees, can result
in excessive payments to departing directors. Payment for failure cannot be tolerated.
Boards should ensure that this cannot occur, both when negotiating new contracts
and when agreeing any payments when contracts are terminated.
10) Special awards and ex gratia payments
Effective remuneration planning involving a balance of short and long term plans,
carefully selected and calibrated performance measures and targets, and annual grants,
should make exceptional awards unnecessary. A need for special grants, particularly
for continuing management, indicates poor planning by the Remuneration Committee.
Special awards may be acceptable when, for example, a new team is brought in to
turn around a company. If such awards are made, the Remuneration Committee must
Shareholders believe that retention awards for main board directors rarely work.
Retention concerns on their own are not sufficient grounds for remuneration to increase.
Shareholders do not support of the practice of paying transaction related bonuses.
SECTION B - FIXED REMUNERATION
1) Base pay
Base pay should be set at a level which reflects the role and responsibility of
the individual, whilst respecting the principle of paying no more than is necessary.
Where Remuneration Committees seek to increase base pay, the reasons should be fully
disclosed and justified. Salary decisions should not be taken purely on the basis
of simple benchmarking against peer companies. If benchmarking is used, the aim
should not solely be to match the “median” but to provide a point of reference for
determining the appropriate salary for the specific job. The constant chasing of
a perceived median has been a major contributor to the spiralling levels of pay.
Remuneration Committees should also be aware of the multiplier effect that increases
in base pay have on the overall quantum of remuneration.
Pension provision can represent a considerable cost to the company and this should
be recognised by the Remuneration Committee when considering total executive remuneration.
Pension related payments should not be used as a mechanism for increasing total
remuneration. The pension provision for executives should, where possible, be in
line with the general approach to the employees as a whole. Any differences in pension
contribution rates for executives and the general workforce should be disclosed
and justified to shareholders.
Payments in lieu of pension scheme participation should be clearly disclosed and
treated as a separate non-salary benefit. There should be informative disclosure
identifying incremental value accruing to pension scheme participation and any other
Changes in pension benefit entitlements or to transfer values reflecting significant
changes in actuarial and other relevant assumptions should be fully identified and
explained. Where changes to pension benefit entitlements or transfers are made at
the discretion of the Remuneration Committee, these should be made clear and justification
should be provided. Pensions paid on early retirement should be subject to abatement.
Benefits should be fully disclosed and, where significant, viewed as an integral
component of fixed remuneration.
SECTION C – VARIABLE REMUNERATION
A significant proportion of executive remuneration should be performance related,
and tied to the achievement of the agreed corporate strategy and long-term value
creation. These Principles do not seek to prescribe or recommend any particular
Shareholders prefer simple remuneration structures; simplicity can be improved by
limiting variable remuneration to an annual bonus and one long term incentive scheme.
No element of variable pay should be pensionable.
1) Annual bonuses
Annual bonuses incentivise performance and reward achievement in line with the agreed
Annual bonuses exist to reward contribution to the business during the year above
the level expected for being in receipt of a salary. They should be clearly linked
to business targets, ideally through the KPIs reported in the Enhanced Business
Review. Where other measures are chosen, these should be explained and justified.
The KPIs can be both financial and non-financial.
The measurements chosen must be quantifiable and the targets set at the start of
Companies should clearly disclose and justify the performance measures chosen and
the related targets. Where consideration of commercial confidentiality may prevent
a fuller disclosure of specific short-term targets at the start of the performance
period, shareholders expect to be informed of the main performance parameters, both
corporate and personal, for the financial year being reported on.
Following payment of the bonus, companies should provide a full analysis in the
Remuneration Report of the extent to which the relevant targets were actually met.
Maximum participation levels should be disclosed and any increases in the maximum
from one year to the next explicitly justified.
Deferring a portion of the bonus into shares can create a greater alignment with
shareholders, particularly where there is no long term incentive. However, this
should not result in an increase in the overall quantum of the bonus.
Shareholders discourage the payment of annual bonuses to executive directors if
the business has suffered an exceptional negative event, even if some specific targets
have been met. In such circumstances, shareholders should be consulted on bonus
policy and any proposed payments should be carefully explained.
Discretion should be retained to ensure that a payment that is inappropriate in
all the company’s circumstances is not made. Companies should disclose the range
of discretion which can be applied to bonus awards.
2) Long-term incentives
Long-term incentives exist to reward the successful implementation of strategy and
the creation of shareholder value over a period appropriate to the strategic objectives
of the company. Equity based long-term incentive schemes are the most effective
way to align the interests of participants and shareholders.
The performance period should be clearly linked to the timing of the implementation
of the strategy of the business, which should be no less than three years and shareholders
would generally prefer longer. Committees should consider the use of additional
All new incentives or any substantive changes to existing schemes should be subject
to prior approval by shareholders by means of a separate and binding resolution.
Any change in quantum should be fully explained and justified.
Scheme and individual participation limits must be fully disclosed in share incentive
The operation of share incentive schemes should not lead to dilution in excess of
the limits acceptable to shareholders.
ii) – Performance conditions
The widely differing nature of business models and industry characteristics means
that the appropriate performance measures and conditions for different companies
may vary significantly. Performance measures and vesting conditions should be fully
explained and clearly linked to the achievement of appropriately challenging financial
performance which will enhance shareholder value.
Whilst other considerations may apply in particular circumstances, for example,
restructuring, shareholders will expect that remuneration policies and structures
will normally be consistent with the following criteria:
• Shareholders have a clear preference for financial measures linked to value creation.
Performance criteria should be linked to the Company’s long-term strategy and targets
reflect an appropriate balance between the shorter- and longer-term.
• Remuneration Committees will need to consider, and explain, appropriate performance
criteria in the light of the specific business characteristics of the group in question.
Performance criteria should fully reflect the performance of the business as a whole
and should be applied consistently across measurement periods.
• The definition of any performance measurement should be clearly disclosed.
• Retesting of performance conditions is not acceptable.
• Remuneration Committees should ensure that, when using in isolation either comparative
or absolute performance metrics, the result does not produce outcomes that are not
in line with the overall performance of the company, its future prospects or the
experience of its shareholders over the performance period.
• Comparator groups used for performance purposes should be both relevant and representative.
Where only a small number of companies is used for a comparator group, Remuneration
Committees should satisfy themselves that the comparative performance will not result
in arbitrary outcomes. Awards should not vest for less than median performance.
• Where operational measurements are used, they would generally be expected:
o To include, subject to business strategy, one or more measures relating to overall
business volume or growth
o To include one or more measures relating to business efficiency or profitability
o To avoid the risk of providing an implicit incentive to take undue operational
or financial risks or, in particular, to adopt an unduly risky capital structure.
• Where Total Shareholder Return (TSR) relative to a relevant index or peer group
is used, Remuneration Committees should satisfy themselves prior to vesting that
the recorded TSR or other criterion is a genuine reflection of the company’s underlying
financial performance, and explain their reasoning.
The calculation of starting and finishing values for TSR should be made by reference
to average share prices over a short period of time at the beginning and end of
the performance period. Lengthy averaging periods should be avoided. Where TSR is
used as a performance criterion and the chosen comparator group includes companies
listed in overseas markets, it is essential that TSR be measured on a consistent
basis. The standard approach should be for a common currency to be used. Where there
are compelling grounds for the calculation to be based on local currency TSR of
comparator group companies, then the reasons for choosing this approach should be
• Remuneration committees may consider other criteria, for example relating to environmental,
social and governance (ESG) objectives, or to particular operational objectives,
to be appropriate. In each case, the link to strategy and method of performance
measurement should be clearly explained.
• Where appropriate, Remuneration Committees should take account of the ABI Guidelines
on Responsible Investment Disclosures.
Threshold vesting amounts, reflecting expected performance, should not be significant
by comparison with annual base salary.
Awards’ structures with a marked ‘cliff edge’ vesting profile are considered inappropriate.
Full vesting should reflect exceptional performance and so be dependent on achievement
of significantly greater value creation than that applicable to threshold vesting.
Sliding scales and graduated vesting profiles are a useful way of ensuring that
performance conditions are genuinely challenging. They generally provide a better
motivator for improving corporate performance than a ‘single hurdle’.
iv) Grant Size
Windfall gains may arise if the level of share or option grants expressed as a multiple
of salary is maintained after a substantial fall in the share price. Where this
risk exists, grants should be scaled back.
v) Clawback and malus
The inclusion of clawback and malus provisions in scheme designs and executive contracts
prevent executives receiving rewards that are undeserved.
Such provisions should be included in relevant arrangements and enforced when appropriate.
The primary information that should be disclosed includes:
• The potential value of awards due to individual scheme participants on full vesting.
This should be expressed by reference to the face value of shares or shares under
option at point of grant, and expressed as a multiple of base salary.
• The maximum dilution which may arise through the issue of shares to satisfy entitlements.
vii) Change of control provisions
Scheme rules should state that there will be no automatic waiving of performance
conditions either in the event of a change of control or where subsisting options
and awards are ‘rolled over’ in the event of a capital reconstruction, and/or the
early termination of the participant’s employment. Remuneration Committees should
use best endeavours to provide meaningful disclosure that quantifies the aggregate
payments arising on a change of control.
In the event of a change of control, the key determinant of the level of awards
vesting should be underlying financial performance. Also, any such early vesting
as a consequence of a change of control should be on a time pro-rata basis i.e.
taking into account the vesting period that has elapsed at the time of change of
control. Remuneration Committees should satisfy themselves that the measured performance
provides genuine evidence of underlying financial achievement over any shorter time
period. They should explain their reasoning in the Remuneration Report or other
relevant documentation sent to shareholders.
viii) Pricing and timing of awards
The price at which shares are issued under a scheme should not be less than the
mid-market price (or similar formula) immediately preceding grant of the shares
under the scheme.
Options granted under executive (discretionary) schemes should not be granted at
a discount to the prevailing mid-market price.
Repricing or surrender and regrant of awards or ‘underwater’ share options is not
The rules of a scheme should provide that share or option awards should normally
be granted within a 42 day period following the publication of the company’s results.
ix) Life of schemes and incentive awards
No awards should be made beyond the life of the scheme approved on adoption by shareholders,
which should not exceed 10 years.
Shares and options should not vest or be exercisable within three years from the
date of grant. In addition, options should not be exercisable more than ten years
from the date of grant.
Where individuals choose to terminate their employment before the end of the service
period, or in the event that employment is terminated for cause, any unvested options
or conditional share-based award should normally lapse.
In other circumstances of cessation of employment1, some portion of the
award may vest, to the extent of the service period that has been completed, but
subject to the achievement of relevant performance criteria. In general, the originally
stipulated performance measurement period should continue to apply. However, where
in the opinion of the Remuneration Committee, early vesting is appropriate, or where
it is otherwise necessary2, awards should vest by reference to performance
criteria achieved over the period to date.
Where options vest, in the event of death or cessation of employment of the option
holder or where a company is taken over (except where arrangements are made for
a switch to options of the offeror company), or where they have already vested at
the time of such event, they must be exercised (or lapse) within 12 months. Where
the performance measurement period applicable to an option extends beyond the point
of cessation of employment, options must be exercised within 12 months of vesting
following the end of the performance measurement period.
Any shares or options that a company may grant in exchange for those released under
the schemes of acquired companies should normally be taken into account for the
purposes of dilution and individual participation limits determined in accordance
with this Guidance.
1Such circumstances may include disability, ill health, redundancy,
retirement or analogous reasons for departure of a ‘good leaver’ nature.
2Such circumstances may include death and also occasions such as takeover
of the company or sale or transfer of the business undertaking where awards are
not being rolled over into equivalent awards in the successor entity or new employer.
The rules of a scheme must provide that commitments to issue new shares or re-issue
treasury shares, when aggregated with awards under all of the company’s other schemes,
must not exceed 10% of the issued ordinary share capital (adjusted for share issuance
and cancellation) in any rolling 10 year period. Remuneration Committees should
ensure that appropriate policies regarding flow-rates exist in order to spread the
potential issue of new shares over the life of relevant schemes in order to ensure
the limit is not breached.
Commitments to issue new shares or re-issue treasury shares under executive (discretionary)
schemes should not exceed 5% of the issued ordinary share capital of the company
(adjusted for share issuance and cancellation) in any rolling 10 year period. This
may be exceeded where vesting is dependent on the achievement of significantly more
stretching performance criteria. The implicit dilution commitment should always
be provided for at point of grant even where, as in the case of share-settled share
appreciation rights, it is recognised that only a proportion of shares may in practice
xi) Joint venture companies and subsidiary companies
Shareholders generally consider it undesirable for options and other share-based
incentives to be granted over the share capital of a joint venture company.
Discretionary grants over shares of a subsidiary company should be made only in
exceptional circumstances. Where companies can justify doing so in terms of contribution
to overall value creation, shareholders may consider exceptions, subject to the
• Participation in subsidiary company schemes is restricted to those whose time
is fully allocated to that subsidiary. Parent company directors should not participate
in such schemes.
• There is full disclosure of the accounting treatment used when recognising the
cost of option or share awards.
• Grants of options or share awards are subject to appropriately challenging performance
• Dilution limits relating to the subsidiary company should be disclosed in the
context of parent company dilution limits.
• The methodology for valuing the subsidiary company shares and, in the case of
option awards, the measurement of volatility of those shares should be disclosed.
The party responsible for the valuation process should also be disclosed.
• Any entitlement or obligation to convert subsidiary company shares to parent company
shares should be disclosed.
Shareholders may consider further exceptions where the condition of exercise is
subject to flotation or sale of the subsidiary company. In such circumstances, grants
should be conditional, so that vesting is dependent on a return on investment that
exceeds the cost of capital and that the market value of the shares at date of grant
is subject to external validation.
Exceptions will apply in the case of an overseas subsidiary company where required
by local legislation, or in circumstances where at least 25% of the ordinary share
capital of the subsidiary company is listed and held outside the group.
xii) Particular types of scheme
a) Matching schemes
Any matching shares allocated will be considered by shareholders as part of the
quantum of total remuneration. The performance conditions should be appropriate
to the total amount potentially to be received, including matching shares. Matching
schemes may add unnecessary complexity.
b) Option schemes
Dividends should not be paid or accrue in the period prior to exercise, as the
shares are not owned by the participant.
c) Measurement of the performance pre-grant
Measuring performance achieved prior to the point of grant is generally not favoured.
If pre-grant performance measurement is considered appropriate, it should be carefully
justified, and accompanied with genuinely long holding periods and significant shareholding
xiii) Employee Share Ownership Trusts - ESOTs
ESOTs should not hold more shares at any one time than would be required in practice
to match their outstanding liabilities, nor should they be used as an anti-takeover
or similar device. Furthermore, an ESOT’s deed should provide that any unvested
shares held in the ESOT shall not be voted at shareholder meetings. The prior approval
of shareholders should be obtained before 5% or more of a company’s share capital
at any one time may be held within ESOTs.
Where companies have provided for an ESOT to be used to meet scheme requirements,
they should disclose the number of shares held by the ESOT in order to assist shareholders
with their evaluation of the overall use of shares for remuneration purposes. The
company should explain its strategy in this regard.
xiv) All-Employee Schemes
All-Employee schemes, such as SAYE schemes and Share Incentive Plans (SIPs) - (formerly
known as AESOPs), should operate within an appropriate best practice framework.
If newly issued shares are utilised, the overall dilution limits for share schemes
should be complied with. The Guidance relating to timing of grants (except for pre-determined
regular appropriation of shares under SIPs) applies.
APPENDIX ONE – BIS PROPOSALS ON EXECUTIVE PAY AND GUIDANCE ON THE NEW REGULATORY
The BIS consultation on Remuneration Reporting outlined the importance of guidance
on the level of detail, and type of information, that should be reported under the
proposed remuneration regulations. Given that the consultation has recently closed
and we are awaiting final details of the reporting requirements, it is too early
to provide any firm guidance.
However, we expect a number of companies will want to start reporting in accordance
with the new regime, which will require companies to include a Policy Table. We
have outlined our members’ expectations below.
• Remuneration Reports should provide context of why the Committee has made the
decisions it has made and why. Investors want companies to avoid boiler plate or
narrowly legalistic disclosures.
• Under the current proposals, there is no specific requirement for companies to
disclose the Committee’s positioning of remuneration potential against peers. Investors
find this form of disclosure informative and think it should be included as a matter
• Investors would expect the Policy Table to be disclosed annually, so they can
easily locate the Policy currently in force and consider how it has been implemented.
• If the Policy Report is being put to a binding vote, the Committee should clearly
outline any changes in Policy and explain why they are being made.
• The key aspect will be the level of detail provided by companies in the Policy
Table; and, in particular, the need to strike the right balance between providing
enough flexibility for companies to attract and retain the right employees and for
investors to have sufficient detail to ensure the policy has sufficient boundaries.
Members are seeking the following disclosures within the Policy Table:
o Basic salary – The scope of any future salary increases should be outlined. This
could relate to an amount above inflation, or to increases in line with the general
workforce. There could be exceptions for new hires or changes in responsibilities.
o Annual Bonuses – The level of bonus at threshold, target and maximum should be
disclosed. The weighting of financial and non-financial measures should also be
included, as should level and terms of deferral.
o LTIPs – Normal and maximum grant sizes should be disclosed, as well as the performance
metrics and actual vesting schedule against performance conditions.
o Pension – Details of pension contribution rates and any other contractual provision
relating to pensions should be disclosed.
• The Policy Table should include a section on recruitment of new Directors. This
may include the treatment of any recruitment awards, particularly what performance
conditions would be attached, and how the Committee will calculate the size of awards
based on the forfeiture of awards from a previous employer.
Service Contracts and Exit Payments
Companies should disclose their definitions of good and bad leavers and the approach
they will take with each type of leaver for each element of pay.