New corporate governance regulations on remuneration

EXTERNAL advisers, remuneration committees and non-executive directors are to play a stronger role in defining the balance between the salaries and bonuses of senior executives, according to Frank O’Dwyer, CEO of the Irish Association of Investment Managers.

This is one of the key messages to be delivered at a PwC-hosted business briefing in Dublin today on new corporate governance regulations on remuneration in Irish companies.

Mr O’Dwyer’s guidance on remuneration will be followed by a briefing by PwC director Tom Mahon on the use of share-based and equity-based schemes as an efficient means of rewarding directors.

While new EU-driven regulations have a strong focus on redefining remuneration structures in financial services companies, the new Capital Requirement Directive III (CRD3) will define the way most public companies define the balance between a director’s salary and bonus.

Frank O’Dwyer said: “The institutions all support the idea of pay and bonus. If you just pay a flat fee then you have no leverage for performance. In financial institutions, the bonus used to be all about profit.

“Now there is a greater focus on the balance of lending, debt levels and operating earnings. The target might be to reduce debt levels, or perhaps volume, margin or geographic expansion.

“Under CRD3, public companies will have a remuneration committee, which will have far more disclosure in designing rewards structures. External advisers will judge what is a fair reward. All financial institutions need to ensure there is no undue risk.

“This can be guided by remuneration, by rewarding good governance. For instance, only a portion of the bonus might be in cash; the rest would be deferred for a period of three years. If you have been overly aggressively lending in those three years, for instance, you won’t get that deferred bonus.

“There are a lot of valuable elements to CRD3. There is a provision for a clawback of a bonus that was incorrectly paid. Britain and France have provided good examples of how to ensure that the fixed pay makes sense. CRD3 will keep a focus on ensuring that the bonus doesn’t incentive excessive risk taking.”

At today’s briefing, Mr O’Dwyer will outline the framework of the new remuneration directives. He will explain how care and good corporate governance will be used to more clearly define the reasons for awarding a bonus to a senior executive. The talk will also examine the importance of selecting people with appropriate insights into specific industries when it comes to selecting remuneration committees and non-executive directors, both in terms of governance and the perceptions of the international business community.

Meanwhile, the briefing by PwC’s Pat Mahon will outline how companies are looking to revenue-proof profit-sharing schemes as one tax-efficient means of rewarding performing executives.

A recent PwC survey found that 68% of Irish companies are reviewing their bonus plans. The survey also found that a lot of Irish companies have profit-sharing schemes in place, but they are less prevalent among multi-nationals.

Mr Mahon noted: “For senior staff members, companies are looking at restricted share award schemes, such as clog schemes. If you give someone shares in the company and restrict them from selling those shares for five years, then they are taxed on a smaller revenue.”

For instance, a five-year restriction on selling shares worth €10,000 adds up to a CGT tax saving of around €3,000. Mr Mahon’s talk this morning will explain to attendees how these schemes operate, and outline the tax-efficient opportunities as well as the legal obligations facing the employer.