Legal & General Investment Management (LGIM) updated “Principles on executive remuneration”

On 28th November 2018 Legal & General Investment Management (LGIM) published their updated “Principles on executive remuneration”.

This document is designed to articulate the principles that support their corporate governance and voting policy on executive remuneration. Detailed policy and guidance on executive remuneration is contained within their UK policy on Corporate Governance. http://www.lgim.com/files/_document-library/capabilities/uk-policy-2018.pdf

Key features include:

Structure and operation of the Remuneration Committee

The chairman of the Remuneration Committee should have appropriate knowledge of the business to align remuneration with the strategy of the company.  For this reason the person appointed to the role of Remuneration Committee chairman should have served on the board for at least a year prior to their appointment.

LGIM will  vote  against  the  election  of  individual  board directors  where  they  do  not  support remuneration for the second consecutive year.  LGIM may also vote against individual directors where there are particularly contentious issues.

Pay ratios

LGIM expects all companies to provide a pay ratio regardless of whether they have 250 full time equivalent UK employees or not. Where they do not have 250 UK employees a statement to this effect can explain the basis on which the ratio was calculated.

LGIM is mindful that the Department for Business, Energy & Industrial Strategy offered three options on how to calculate these ratios. To ensure meaningful comparability, they would expect companies to adopt methodology option A – which requires the company to calculate the pay and benefits of all its UK employees for the relevant financial year in order to identify the 25th, 50th and 75th percentile employee and use these numbers when calculating these ratios. Where another option is adopted, they would expect a full explanation of why the adoption of methodology A was not possible.

Pension

Pension arrangements should be reduced over time so that they are more closely aligned with the general workforce. At the next remuneration policy review, LGIM expects companies to introduce a pension provision for new board directors that is aligned with what is being offered to the general workforce.  In addition, where contracts are being re-negotiated for existing directors we expect pension provisions to be lowered.

LGIM will be voting against the remuneration policy from 2020 where there has not been any changes to address the disparity in pension provisions unless the company can demonstrate that similar arrangements are available to the workforce

Bonus

Bonus – LGIM would encourage the reduction of short-term annual bonus levels. A bonus of 200% of salary should be reserved for the largest global companies.  LGIM will not support any increases to the annual bonus going forward.

LTIP

LGIM advocate the use of only one Long Term Incentive Plan with no more than four performance measures. Long-term is defined as a minimum of three years of performance. They will oppose any new matching plan or renewal of existing matching scheme, and will not support performance on grant schemes, bonus banking schemes. One-off schemes are generally not supported.

Restricted schemes

Companies will have to justify why this type of arrangement is appropriate and why the existing arrangement is no longer suitable. Award levels should be reduced to 50% or less than the normal long-term incentive grant to take into account the greater level of certainty. Shares should be held for a minimum of five years prior to release.

Shareholding

A shareholding guideline must be in place that is material whilst in employment and post-exit. The shareholding requirement should be linked to the value of total variable pay.  As a guide, in terms of size on the FTSE 100 index:

FTSE 1 – 30: 5x salary

FTSE 31 – 50: 4.5x salary

FTSE 51 – 100: 4x salary

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