Remuneration and share plans: New Year update

21 January 2022

Welcome to our remuneration and share plans New Year update. In this edition we review some of the key developments from last year that will continue to impact executive remuneration and share plans in 2022.

The key developments include:

The principles of remuneration for 2022

The Investment Association’s annual update of its principles of remuneration was published on 18 November 2021 (the Principles). The key changes are set out below and reflect developments in market practice and investor expectations.

Listed companies may want to review their arrangements and consider whether changes should be made in order to comply with the Principles in anticipation of the 2022 AGM season so as to reflect best practice and good corporate governance.

Environmental, social and governance (ESG) issues

Where ESG risks or objectives have been incorporated into a company’s business strategy, companies should consider the extent to which such risks or objectives should be reflected in the company’s variable remuneration arrangements.

The Investment Association notes that the impact of material ESG risks on the long-term value of companies is becoming increasingly apparent. As a result, a greater number of companies are incorporating the management of material ESG risks and opportunities into their long-term strategy. In these cases, it is appropriate that remuneration committees consider the management of these material ESG risks as performance conditions in the company’s variable remuneration. As with any other performance condition, it is imperative they are clearly linked to the implementation of the company’s strategy.

A majority of FTSE 100 companies now include specific ESG metrics or discretions in their short or long-term remuneration arrangements.

Malus and clawback

The two current market standard triggers for malus and clawback - “gross misconduct” and “misstatement of results” - do not go far enough and, as noted before by the Investment Association, remuneration committees should establish a list of specific circumstances in which malus and clawback would apply. In addition, remuneration committees should set out their approach to enforcement in the company’s annual report.

Base pay and pay increases

Remuneration committees are now required to fully disclose and justify any increase in base pay beyond the increase awarded to the wider work force. The Investment Association is clear in that any such increase in salary cannot be justified by reference to “market-level” pay or benchmarking which in their view is a major contributor to spiralling levels of pay.

Annual bonuses

When approving the payment of any bonus, Remuneration Committees are expected to take into account whether the level of payout is appropriate in the context of the wider stakeholder experience, particularly that of shareholders and employees. Additionally, companies should disclose why their remuneration committees are satisfied with that level of bonus payout.

Restricted share plans (RSPs) and value creation plans (VCPs)

The Principles acknowledge that restricted share plans are sometimes introduced in situations where a company has experienced a substantial fall in its share price. In such circumstances, Remuneration committees should be particularly mindful of the potential for windfall gains when considering the initial grant of restricted shares. The Investment Association has previously been clear that where a company is moving from an LTIP to a RSP, a discount rate of at least 50% of the normal grant level would be appropriate. However, this discount may be insufficient if there has been a substantial fall in the share price since the last LTIP grant. Remuneration committees should conduct an annual review to ascertain whether the grant level is appropriate given the company’s financial and share price performance. In such circumstances, companies should scale back awards further at the time of grant.

VCPs – which typically involve the grant of one-off awards to executives with the potential for substantial payouts in the event of significant increase in shareholder value - should not be considered a standard arrangement and should only be used where they are appropriate to the specific circumstances of the company. A clear rationale for their use should also be provided to investors. VCPs should also have an overall cap on shares and the total value of awards. Given the significantly increased maximum opportunity under a VCP, targets need to be substantially more stretching and sufficiently robust. A clear rationale will also be needed as to why the performance targets and percentage of any value created above a predetermined hurdle rate are appropriate.

Grant size

The Principles emphasise that where share or option prices have fallen, investors prefer companies to reduce the size of the award at grant, rather than relying on the discretion they may have upon vesting.

Directors’ service contracts

The Principles now contain more detail on setting and terminating directors’ service contracts, which replaces the previous Investment Association and PLSA statements on the topic. Among other things, the Investment Association encourages companies to set contracts with a fixed term or notice period of one year or less, align executives’ financial interests with those of the company, and ensure that termination payments arising from poor corporate performance do not extend beyond fixed pay.


The Investment Association recommends that pension-related payments should not be used as a mechanism for increasing total remuneration and that the pension contributions of executive directors should be aligned with the majority of a company’s workforce by the end of 2022.

FRC annual review of corporate governance 2021

The Financial Reporting Council (FRC) has published its annual review of corporate reporting for 2020/2021. The review sets out the FRC’s expectations for reporting across the five sections of the UK corporate governance code (the Code) and, while the report records a general improvement in the level of governance reporting, it identifies areas where improvement is required – notably the disclosures relating to non-compliance with the Code, board appointments, diversity and succession planning – as summarised below.

General areas for improvement:

Comply or explain reporting – companies should be explicit when they have not complied with the Code and provide context and background for non-compliance, the rationale for the approach being taken and how the issue will be addressed.

Executive remuneration less than half of companies explained how remuneration supports strategy sufficiently. The choice of performance metrics is crucial, and it should be clearly explained in the remuneration report how the chosen metrics align with the company’s purpose and support its strategy.

Engagement with employees on remuneration – greater detail should be provided on engagement with employees regarding remuneration matters including methods of engagement, issues that were discussed and outcomes.

Engagement with shareholders – the report noted that while almost three quarters of companies surveyed reported seeking input from a range of investors beyond the largest shareholders, few provided commentary on how the views informed board decisions. Companies should seek to demonstrate the effectiveness of the engagement process in their FRC reporting.

Committee discretion - Companies should explain whether their remuneration committee has used its discretionary powers to override remuneration outcomes.

FCA publishes the final remuneration rules under its new Investment Firms Prudential Regime

On 22 October 2021, the FCA announced the publication of the final rules of its new Investment Firms Prudential Regime (IFPR) set out in the FCA’s updated handbook. Part of these rules introduce significant changes to the remuneration policies and practices of FCA-regulated investment firms in scope of IFPR.

The IFPR final rules include a new remuneration code in SYSC 19G– the “MiFIDPRU remuneration code” – which sets out detailed provisions which in-scope investment firms will need to comply with as of their first performance period commencing on or after 1 January 2022. The new MiFIDPRU remuneration code replaces existing FCA remuneration codes for BIPRU and IFPRU firms and will operate alongside the FCA’s AIFM and UCITS V remuneration codes for relevant firms.  

The FCA has taken a proportionate approach to how firms apply the IFPR remuneration rules by categorising investment firms into three different groups each with a set of remuneration rules that reflect the level of risk that a firm poses to its customers and the markets. The three categories and related remuneration rules are summarised below.

Basic remuneration requirements

These are the basic rules that apply to all types of IFPR investment firms and they are the only IFPR remuneration rules that “small and non-interconnected” firms (SNIs), are required to apply. The basic remuneration requirements make up the regulatory requirements relating to a firm’s remuneration governance, including the review and oversight of its remuneration policy, measuring performance based on financial and non-financial criteria, ensuring that the balance between fixed and variable pay is appropriate and independence of control function pay. SNIs and their staff will only have to apply the IFPR’s “basic remuneration requirements”. Non-SNIs will be required to apply additional remuneration rules in addition to the basic remuneration requirements as is explained in the following sections.

Standard remuneration requirements

These rules apply to larger firms, those that are “non-small and non-interconnected FCA firms” (non-SNIs), in addition to the basic remuneration requirements. Non-SNI firms must comply with further rules, referred to as “standard remuneration requirements”, which include identifying material risk takers (MRTs), setting an appropriate ratio between variable and fixed remuneration as well as applying appropriate risk adjustment (malus and clawback) terms to awards of variable remuneration.

Extended remuneration requirements

These rules apply to only to the largest non-SNIs, in addition to the basic remuneration requirements and the standard remuneration requirements. The largest non-SNIs will have to apply extended remuneration rules which include more stringent requirements in respect of deferral, payment in instruments, retention and treatment of discretionary pension benefits. The largest non-SNI firms will also need to establish a remuneration committee.

For some firms, the new categorisation of investment firms will mean significant changes to the way in which they remunerate their senior staff. For others, the new rules will result only in minor amendments being made to their remuneration policies and practices. In both cases, a review will be required to ensure that all the requirements are adhered to.

EBA publishes updated guidelines on sound remuneration policies for banks and credit institutions

The European Banking Authority (EBA) published the final report on its revised guidelines on sound remuneration policies under the CRD IV Directive (2013/36/EU) on 2 July 2021 (the CRD V guidelines). The revision to the existing EBA guidelines reflects amendments to the remuneration rules that apply to banks and credit institutions which were introduced by the CRD V Directive at the end of 2020.

The CRD V guidelines will apply to competent authorities across the EU, as well as to institutions on an individual, consolidated and sub-consolidated basis (with some exceptions for financial institutions that are subject to a specific remuneration regime such as the Investment Firm Directive). The revised guidelines will apply from 31 December 2021 and have therefore already come into force.

While the CRD V guidelines are addressed to competent authorities of EU member states, they do not expressly cover the UK post-Brexit. However, we expect that the FCA and PRA will have an eye on them, since they build on the CRD V Directive that the UK has implemented.

The most significant differences between the original and the CRD V Guidelines are summarised below.

Gender-neutral remuneration policy

The CRD V Guidelines require institutions to have a gender-neutral remuneration policy, including in respect of the award and pay out conditions for remuneration. The guidance states that there should be no difference between staff of “male, female or diverse” genders that suggest that institutions take into account working time arrangements, annual leave periods and other financial and non-financial benefits in order to monitor the implementation of gender-neutral remuneration policies. Institutions should also take steps to document the value of different positions and determine which positions are considered as having an equal value. It is suggested that this might be done, for example, by documenting job descriptions, defining wage categories or implementing a job classification system based on the same criteria for all genders.

In addition to ensuring that institutions’ remuneration policies and practices are gender-neutral, the updated guidelines expect an independent annual internal review of those policies and practices. Such review should include an analysis of whether the remuneration policy is gender-neutral, including a new requirement for institutions to monitor the development of the gender pay gap on a country-by-country basis for different categories of staff, and to explain and take action where there are material differences in the average pay of males and females.

Retention bonuses and severance payments

The revised guidance seeks to ensure that retention bonuses are only awarded where the firm can clearly demonstrate that they are justified and clarifies, amongst other points, that retention bonuses must comply with the relevant requirements on variable remuneration, including the "bonus cap", with guidance specifying how the retention bonus should be included in the calculation of variable pay for the purposes of the "bonus cap". The EBA noted in their consultation that these revisions are based on supervisory experience regarding cases of circumvention.

The revised guidance now clarifies which payments can properly be regarded as severance payments and those which should not, and also clarifies when severance payments can be excluded from the scope of the deferral, payment in instruments and "bonus cap" remuneration rules. As with retention bonuses, the EBA noted in their consultation that these revisions are based on supervisory experience regarding cases of circumvention

Material risk taker identification

Extensive updates have been made to reflect the CRD V changes to the process of identifying material risk takers and also the new regulatory technical standards (RTS) on identifying material risk takers. Amongst other things, the updates reflect the removal of the requirement to notify regulators of material risk taker exclusions where regulatory approval is not being sought.

Remuneration policy

Alongside other existing requirements, a firm’s remuneration policy for all staff should also be consistent with the firm’s “risk strategy”, including with regard to ESG risk-related objectives, and “risk culture”.


The EBA has removed the statement that clawback should, in particular, be applied “when the identified staff member contributed significantly to the subdued or negative financial performance [of the firm]”. The EBA has, however, added an expectation that where the application of malus is not possible in connection with an award due to the deferral requirement being disapplied using proportionality, firms should ensure that clawback can be applied instead.

EBA publishes new guidelines on sound remuneration policies for EU investment firms

On 22 November 2021, the EBA published the final report on its new guidelines on sound remuneration policies for investment firms (the IFD Guidelines) under the Investment Firms Directive (IFD).

The IFD Guidelines provide further details on how the IFD provisions on remuneration policies and variable remuneration paid to “identified staff” of investment firms subject to the IFD. To a large extent, the IFD Guidelines are consistent with the existing remuneration guidelines issued by the EBA under the CRD IV, as recently updated by the EBA to reflect CRD V, see above. Key differences between the IFD and CRD V remuneration rules include, for example, the absence of a bonus cap, differences in instruments and the length of deferral periods all of which have been reflected in the IFD Guidelines.

The IFD Guidelines will come into force on 30 April 2022 and will apply to competent authorities across the EU as well as to EU-based investment firms on an individual and consolidated basis. Following the UK’s exit from the EU, the IFD Guidelines will not apply to FCA-regulated investment firms.

Gender neutral remuneration policy

As with the CRD V Guidelines, the EBA require that all aspects of the remuneration policy and practices thereunder must be gender-neutral in accordance with the IFD. Firms should therefore comply with the principle of equal pay for equal work or equal value of work. The provisions on anti-discrimination and equal opportunities have been retained as they are important to foster diversity in the longer term and to reduce the gender pay gap over time.

Content of the IFD Guidelines

The IFD Guidelines on remuneration consist of six titles (all of which are broadly in line with the CRD V Guidelines), namely:

  • Requirements regarding remuneration policies – which deals with remuneration policies for all staff, the governance of remuneration, remuneration policies and governance of remuneration in a group context, proportionality, the identification process and capital base.
  • Requirements regarding the structure of remuneration – this section addresses categories of remuneration, particular cases of remuneration components, exceptional remuneration components and prohibitions.
  • Remuneration of specific functions – this focuses on the remuneration of members of the management and supervisory function of the management body and remuneration of control functions.
  • Remuneration policy, award and payout of variable remuneration for identified staff – which deals with the remuneration policy for identified staff, the risk alignment process and the payout process for variable remuneration.
  • Investment firms that benefit from government intervention – this section focuses on State support and remuneration.
  • Requirements for competent authorities – the final part of the consultation is relevant to national regulators and deals with remuneration policies and practices, disclosures and the colleges of supervisors.

Vermilion Holdings Limited v HMRC [2021] CSIH 45


The Vermilion case concerned an option to buy shares issued to Mr Noble in 2006 in return for advisory services provided to Vermilion Holdings Limited (Vermilion) through Mr Noble’s company, Quest Advantage Limited. Later that year, Vermilion was going through serious financial difficulty and as part of a refinancing package in 2007, Mr Noble was appointed as a director and granted a new share option replacing the 2006 option, which he agreed to cancel. When Vermilion was sold in 2016, the option was exercised resulting in a payment of £636,238 to Mr Noble.


The issue in the case was whether the new share option was an employment related security (ERS) within the meaning of s.471 Income Tax (Earnings and Pensions) Act 2003 (ITEPA). This was a contentious point as it would determine whether the payment made by Vermilion on exercise of the new option was subject to capital gains tax or income tax treatment. If the new option was an ERS, the payment on exercise would be subject to income tax and National Insurance contributions (NIC) in the hands of Mr Noble.


Under s.471(1) ITEPA, an ERS is a security option made available to a person by reason of their employment. S.471(3) ITEPA contains a deeming provision which provides that where the security is made available by a person’s employer, that security is deemed to be made available by reason of that person’s employment.

First-tier Tribunal Decision

The First-tier Tribunal (FTT) decided that the 2007 option was outside the scope of s.471(1) because it was Mr Noble’s right under the earlier option that resulted in the grant of the 2007 option and not his employment as a director of Vermilion. The right to acquire the 2007 option emanated from the right under the earlier option and therefore was not "by reason of an employment". The FTT went on to consider HMRC's argument that the deeming effect of section 471(3) meant that share options must be treated as provided by reason of employment if they are issued by the employer, and therefore the 2007 option was within section 471. In the view of the FTT, the relevant question was simply whether the right to acquire the 2007 option was “made available” by Vermilion. That question had to be answered in the affirmative, because Vermilion granted the 2007 option. However, the FTT thought that an anomaly resulted from this. It had concluded that the 2007 option was not within the scope of section 471(1), as it had not been caused by reason of employment, yet it was nevertheless to be deemed to have been so caused by section 471(3). In the view of the FTT, this would lead to an injustice and an absurd outcome and therefore the deeming provision should be limited accordingly.

Upper Tribunal Decision

HMRC successfully appealed to the Upper Tribunal (UT). The UT decided that the 2007 option was an ERS because it was a condition of the grant of the option that Mr Noble would be employed as a Director of Vermilion. The option was therefore granted by reason of the employment and fell within the ambit of s.471(1), so consideration of the deeming rule was not required.

Court of Session Decision

Vermilion’s appeal was allowed by a majority verdict and the decision of the FTT was reinstated. Lord Malcolm in particular emphasised that the grant of the replacement option and the directorship were both terms of the refinancing package so it could not be said that the employment was the "operative cause" of the grant of the option. Lord Doherty drew attention to the transaction being one of compromise and exchange in that the 2007 option was granted in return for the 2006 option being given up and so the 2007 option could not have been "made available" by Vermilion, as required to fall within the deeming rule in s.471(3). Lord Doherty considered that it would be "anomalous, absurd and unjust" if the right or opportunity to acquire the 2007 option was to be treated as having been made available to Mr Noble by his employer. Lord Carloway, in his dissenting judgement took the view that the 2007 option was made available by virtue of Mr Noble’s employment as the 2006 option had become worthless when the refinancing was agreed.


The Court of Session’s decision is significant as it suggests that there may be circumstances where the literal interpretation of the deeming rule will not necessarily apply. We understand that HMRC will be appealing to the Supreme Court for a further decision to be made so this position will be tested again.