Remuneration and share plans update

11 January 2023

Welcome to the latest Macfarlanes remuneration and share plans update in which we look at the key highlights and developments in the remuneration and share plans sector during the third and fourth quarters of 2022.

The IR35 hokey cokey

On Friday 23 September 2022, the short-serving Chancellor, Kwasi Kwarteng, announced in the “mini-budget” that the recent wide-ranging changes to the “off payroll worker” rules (commonly referred to as IR35) were going to be reversed from 6 April 2023.  This reversal was subsequently cancelled by Jeremy Hunt on 17 October 2022 which means, in short, that there will be no changes to the way in which the current rules work.

By way of a brief recap, the rules which have been in place since 6 April 2021 require that businesses that meet criteria to be classified as “medium or large” must determine the tax employment status of contractors who provide services through intermediary entities (such as personal service companies).  That determination must be shared with each contractor.

The determination is based on a number of factors such as the degree of control exercised over the activities of the contractor; the extent to which they are integrated within the business; the nature of their remuneration; and whether they can provide a “substitute” to provide the services on their behalf.  This can be a challenging assessment for businesses to make, and the starting point for making this determination is generally the HMRC “check employment status for tax” (or CEST) tool.

Payments made to contractors who are “deemed employees” must be subject to PAYE and employee NIC withholding, as well as employer NIC.

For those businesses that engage contractors and non-employee service providers, we therefore continue to recommend taking the following practical steps:

  1. Establish whether the IR35 rules apply to them.
  2. Have a comprehensive internal policy covering everything from identification of contractors within a business, to who makes the status assessments, and the process for communication of those assessments to contractors.
  3. Ensure payroll is set up to operate PAYE, where required.
  4. Ensure engagements with contractors take the IR35 rules into account (e.g. with indemnity provisions for PAYE and employee NIC where payments are being made on a gross basis).


Bankers’ bonus cap scrapped


As part of the “mini budget”, delivered on 23 September 2022, the Chancellor announced that the “banker’s bonus cap” will be scrapped. The cap, which was introduced reluctantly by the UK government in 2014 to implement the EU’s 2013 Capital Requirements Directive (CRD), requires a limit on the ratio of fixed to variable remuneration of 1:1 (or 2:1 if shareholder approval is obtained). The CRD remuneration rules were brought in as a response to the 2007-8 financial crisis which was widely seen to be exacerbated by high-risk taking behaviour taken by bankers incentivised by large bonuses.

The cap was never popular with the UK government or with banks who both argued that the measure would do little to reduce renumeration levels for managers and senior staff (referred to as material risk takers or MRTs). Instead, as predicted, banks raised base salaries and many introduced role-based allowances to create a level of non-variable pay to compensate their MRTs for the cap on their bonuses. This in turn led banks to take on higher fixed costs as a result and undermined the flexible renumeration structures that many banks used to reduce wage costs when market conditions were poor.

Implications for banks

Despite the cap being scrapped for banks operating in the UK, it will remain relevant for international banks that operate in EU member states and so continue to be subject to the full requirements of the CRD remuneration rules. For such banks, the application of the cap to MRTs that work across UK and EU jurisdictions will be more complicated.

For UK banks, it will be interesting to see whether the fixed to variable ratio will decrease over time. Shifting remuneration from fixed to variable is not easily done and even banks with role-based allowances would not simply be able to withdraw these from one day to the next – doing so would run the risk of MRTs claiming constructive dismissal.  Rather, banks are likely to have to stagger changes in the makeup of renumeration packages as new MRTs join and existing MRTs’ pay policies are due to be reviewed.

New lease of life for CSOPs

Last but not least from the “mini-Budget” was the news that, from 6 April 2023, the longstanding limit on the value of tax-qualified share options which a qualifying company can offer to its employees under a Company Share Option Plan (CSOP) will double from £30,000 to £60,000 per employee. HM Treasury’s rationale was that “this will encourage employers to offer more shares to their employees, so everyone can share in the success” of the company.

In addition, it was announced that the employee-control and open market shares restrictions attaching to CSOPs will be removed. This will align CSOPs more closely with the rules of the more popular Enterprise Management Incentive (EMI) plans. Currently, if the company using a CSOP has more than one class of ordinary share capital, a majority of shares of the class that is used for the CSOP must be either open market shares (shares held due to reasons other than the shareholders’ status as directors or employees of any company or trustees for such people) or employee-control shares (shares held by current or former directors or employees of the company or of a company it controls which enable those shareholders to control the company). The expectation is that removing this restriction will increase the use of CSOP by private equity houses or other institutions that hold minority interests in investee companies.

CSOP options generally provide tax favourable treatment for both employees (no income tax and employee National Insurance contributions (NIC) and employers (no employer NIC), but their popularity has declined since the introduction of the EMI plan, another discretionary tax-qualified option plan, in 2000. Prior to the introduction of EMI plans, CSOPs were the only discretionary tax advantaged scheme available in the UK.

One of the reasons for the relative popularity of EMI plans when compared to CSOPs is the more generous individual limit of £250,000, which is significantly higher than the existing CSOP limit of £30,000. In addition, EMI plans are generally more flexible and offer additional tax advantages. The decline of CSOPs is illustrated by the fact that there were 5,170 live CSOP schemes in 2000/01 compared to just 1,910 in 2009/10, according to HMRC figures.

Despite the declining use of CSOPs following the introduction of EMI plans, CSOPs have retained a somewhat steady use by companies that either do not qualify for EMI but nevertheless wish to implement a tax-favourable discretionary option plan, or by companies that have outgrown the qualifying company limit set by the EMI rules but wish to continue to grant tax efficient options as part of their overall reward and remuneration strategy (typically for middle managers rather than senior executives). It will be interesting to see whether a doubling of the limit to £60,000 will result in renewed popularity for CSOPs for companies other than those that have outgrown their EMI plans.

Investment Association – New Principles of Remuneration for 2023

On 9 November, the Investment Association (the IA) published its updated Principles of Remuneration (the Principles) for 2023. The IA has 270 members ranging from smaller, specialist UK firms to European and global investment managers with a UK base who collectively manage over £10 trillion for savers and institutions in the UK and beyond.

The changes to the Principles this year focus on factors including the cost-of-living, inflation and economic uncertainty with the suggestion that additional restraint is shown for executive salary increases, as many UK households struggle with the increased cost-of-living. We summarise the key changes below.

Executive Director pay and cost of living increases

Andrew Ninian, Director of Stewardship and Corporate Governance at the IA, notes in a letter to Remuneration Committee Chairs that the current inflationary impact is disproportionally affecting lower-paid workers. Accordingly, inflationary salary increases in respect of executive directors may not be appropriate in the current circumstances.

In normal circumstances, the IA would consider executive salary increases acceptable where these are in line with inflation or at the levels provided to all employees. However, the IA notes that in the current climate, Remuneration Committees should consider whether to exercise restraint in respect of executive salary increase and look more widely at the overall quantum paid to executives when compared to the pay levels and conditions across the entire workforce. In particular, absent special circumstances, it would not be appropriate for Remuneration Committees to seek to increase executive salaries at a level greater than inflation or the increase awarded to the wider workforce.

Addressing windfall gains

The IA first addressed the issue of windfall gains in their 2020 guidance paper, noting that there are potential scenarios in which windfall gains could arise if the level of share grants expressed as a multiple of salary were maintained after a substantial share price fall which was of course particularly relevant during the pandemic. They concluded at the time that Remuneration Committees of companies that had suffered a share price reduction related to the pandemic should monitor the wider market and any share price recovery over the relevant LTIP performance periods to ensure that adjustment to vestings could be made to guard against windfall gains relating to market movements unrelated to performance.

In light of those vesting decisions likely being made by Remuneration Committees in 2023, the IA have reiterated this approach. To ensure that participants in 2020 grants do not benefit from those larger share grants, the IA recommend that Remuneration Committees consider if vesting outcomes need to be reduced. In the spirit of wider shareholder disclosure, this process should be clearly articulated to all shareholders and must set out why these vesting outcomes have either been reduced or maintained.

New hire salaries

Where companies recruit a new executive and decide to pay them less than the previous incumbent, the company should clearly set out its intended salary path, including the timeframe within which it might increase the new executive’s salary.

ESG measures

Reflecting the marked increase in the number of the FTSE100 companies that have incorporated an ESG metric into their variable remuneration (see our separate article later in this Update), the Principles state that any ESG target is material to the business, quantifiable, suitably stretching and clearly linked to the implementation of the company’s strategy. However, companies should not reward executives for “business as usual” activity nor should they be used as a means to increase overall quantum.

Non-Executive Director fees

The IA recognises that Non-Executive Directors’ (NEDs) fees have not always reflected the increased complexity and time commitment expected of their role. They recommend that, given the important oversight role NEDs play, they should receive fees that better reflect the time-commitment, scope and complexity of their role with the caveat that any such increases must be properly explained.


The IA’s corporate governance research service, entitled the Institution Voting Information Service (IVIS), will now designate Remuneration Reports and Policies of any company whose executive pensions are not aligned with those of the wider workforce from 2023 with a “red top”. This is the IVIS’ strongest level of concern and is used to highlight serious breaches in IA guidance.

New SAYE savings prospectus published and review of SAYE bonus rates

The bonus rate mechanism used to calculate the bonus and interest rate when a participant enters into a SAYE contract has been set at 0% since 2014. However, HMRC recently announced a review the aim in order to simplify the mechanism used to calculate the interest / bonus rates for SAYE schemes.

While HMRC undertake this review, the bonus and interest rates are being held at 0%. However, HMRC has issued a new prospectus on 15 June 2022 which removed the reference to the current bonus rate mechanism.

HMRC have committed to providing an update on the review (via a further bulletin) but, in the meantime, companies and administrators are being encouraged to review their SAYE invite and launch documentation to ensure that there is a reference to interest and bonus rates with a view to updating them once HMRC publish further guidance.

HMRC Trust Registration Service

Since 2017, trustees incurring certain UK tax liability have had to register with HMRC’s Trust Registration Service (TRS). The scope of the TRS has since then been widened and trustees will need to review their trusts to confirm if there is now a requirement to register their trust on the TRS.

By way of background, in 2018, HMRC launched an online Trust Registration Service for "taxable relevant trusts". The registration requirements arise under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLR 2017), which derives from the Fourth Money Laundering Directive (2015/849/EU) (MLD4).

The Fifth Money Laundering Directive (2018/843/EU) (MLD5) extended the registration obligation under MLD4 to all “UK express trusts”, except Share Incentive Plan (SIP) trusts and trusts associated with SAYE option schemes.

Following a change in anti-money laundering regulations, the scope and type of trusts required to be registered on the TRS has significantly widened. HMRC now require all UK express trusts (i.e. any trust established in the UK and/or a UK-based nominee arrangement) and many non-UK trusts that are not liable to UK taxes to register. Non-UK trusts that have at least one UK trustee, provided they are not registered in an EEA state, and those with no UK trustees that enter into a business relationship with certain institutions carrying on business in the UK are required to register.  While the regulations exempt registration for trusts established for certain incentive arrangements, trustees are still required to provide information regarding these trusts to the TRS.  

Trustees of existing registrable trusts who have not already registered their trusts should do so as soon as possible. For new trusts or nominee arrangements, the deadline is 90 days after creating the trust.

ESG and remuneration – Our FTSE 100 study results

Our latest study of the FTSE 100 companies’ remuneration reports for the 2021 financial year has revealed significant increases in both the number of companies that apply ESG performance measures under their short and long term incentive plans (LTIP), as well as greater weighting being given to these measures when determining pay-outs.

Our findings are perhaps unsurprising given increasing public focus on ESG. However, they highlight that it has now become the norm for companies to go beyond rhetoric to financially embed ESG metrics into key individuals’ remuneration packages. We found that 80 of the FTSE 100 companies now mention ESG measures in their remuneration reports, with 69 companies linking such measures directly to reward levels. This marks an ever increasing number of companies setting ESG targets under their bonus or LTIPor, in some instances, both. The number of companies doing so last year was 45 and 40 the year before. Notably, almost half of companies that have not yet adopted ESG measures in their plans, now state in their reports that they intend to do so in the future.

Looking more closely at the FTSE 100 companies that have adopted ESG targets in their incentive plans, our study showed that the majority of companies (59) include ESG targets in their short term (i.e. bonus) plans, whereas fewer include them in their LTIPs (26). Only 16 use ESG targets in both their short and long term incentive plans. However, caution should be taken before interpreting this as a trend as LTIP measures are typically chosen or reset only in connection with the renewal of a company’s remuneration policy (every three years), whereas bonus plan measures in policies are often sufficiently flexible to accommodate various non-financial targets, such as those relating to ESG. 

In terms of the type of ESG measures we have identified, short term plans seem to better accommodate input measures (which focus on behaviour change), whereas output measures (which focus on outcomes) are better suited within LTIPs. While the most common measures we see in short term and long term plans continue to relate to carbon reduction, there is a marked increase in the inclusion of newer measures such as diversity and inclusion. 

In addition, the weighting that the FTSE 100 companies have given to ESG measures has increased by almost 5% on average since our first study in 2019.

Overall, our study of the 2021 remuneration reports suggests that the determination of remuneration outcomes in 2022 will continue to have greater focus on ESG measures. How this will play out and what steps will be taken by the minority of companies that didn’t have ESG embedded in their incentive plans in 2021 will be interesting to see.