30 October 2000
Court of Appeal clarifies directors’ fiduciary duties and the business judgment rule for executive compensation matters
12 August 2014
31 March 2014
Law at Work — February 2014: reasonableness and extent of restrictive covenants did not apply to actions as a minority shareholder
28 February 2014
11 February 2014
18 July 2014
In recent months there have been a number of high-profile corporate appointments and casualties, and the generosity of the packages and compensation payments on termination have caused legitimate public concern. This concern has been evidenced by press reports criticising the huge sums paid out to directors ousted from the board on the basis of poor performance. Pension payouts, share options and "golden parachute" payments have led to termination payments in excess of £1m being awarded, based upon the contractual rights of the individual upon termination.
Following the Greenbury report, the Hampel report and the Combined Code, there has been a move towards the incorporation of a "performance-related bonus" as part of a director's total remuneration. The Combined Code, which applies to companies listed on the Stock Exchange, provides that companies - and more particularly remuneration committees - should specifically address the payments to be made on termination when entering into a contract with a new executive. Furthermore, when considering bonuses based on performance, remuneration committees are required to set specific annual targets geared to the enhancement of the business and to consider upper limits to any bonus payments. Companies should take care to ensure that the bonuses provided are discretionary in nature to avoid argument that the expected bonus payment should be included within any termination payment.
One way to remunerate an executive is to pay them partly in shares, either through their bonus arrangements or in place of salary. Linklaters recently advised on one such arrangement for the new chief executive officer (CEO) of International Power, following the demerger of National Power into International Power and Innogy Holdings, where the CEO will be remunerated almost solely in terms of shares, with a current day value of £2m over a three-year period. His "take-home pay" will truly reflect one measure of company performance. If the market recognises an increase in the performance of the company, then his "pay" will go up; if not, it will go down.
There are, however, a number of issues which need to be considered in this type of arrangement, not least because not every CEO will welcome the lack of a monthly pay cheque. In this case the CEO, unlike his fellow directors, will not participate in the pension or healthcare schemes or the annual bonus plan.
Institutional shareholders are likely to have a view on this type of arrangement, although they ought to be supportive, since what is good for the CEO will be good for them. Nevertheless, the inter-relationship with other share plans the company might have, such as long-term incentive plans, will need to be reviewed. Also, how long should such an arrangement last? In this case the CEO has a three-year fixed-term contract. That in turn requires consideration against the Combined Code's predilection for one-year notice periods.
Then there are a number of legal issues to consider. Ironically, how does such a share-only package fit in with the employer's obligations under the National Minimum Wage Act? Shares are not wages. In this case, the CEO does have a monthly allowance. Also, how do you balance the employer's desire to terminate employment prematurely in certain situations and the CEO's expectation to retain the shares they have "earned" but not yet received? Unsurprisingly, the International Power service contract contains detailed termination provisions. Change of control is another event that needs to be catered for, and that requires looking at diverse rules, such as the Takeover Code, the Listing Rules and directors' fiduciary duties.
Payment in shares may be one way to alleviate Government, shareholder and public concerns over excessive compensation of poor performers. Companies, shareholders and executive directors are likely to take a keen interest in how this arrangement works out.
Raymond Jeffers, head of employment, Linklaters.