4 CORPORATE GOVERNANCE - REVISED ABI GUIDELINES ON EXECUTIVE REMUNERATION

The new version of the Association of British Insurers ("ABI") guidelines on executive remuneration (the "Guidelines") was published in December 2006. Designed to provide a practical framework and reference point both for shareholders in reaching voting decisions and for companies in deciding upon their remuneration policy, the Guidelines should be considered part of a public company's corporate governance regime.

The Guidelines have been rewritten in a clearer format, to make them easier to use. In substance they are largely unchanged from the previous guidelines and no more prescriptive, but some changes have been made in relation to share schemes and pensions (summarised below).

In particular, the ABI is concerned about upwards ratcheting of pay. Remuneration committees are urged to keep increases in overall remuneration in line with improvements in performance and the ABI expressed particular concern about any increase in bonuses made to compensate for the failure of share schemes to pay out.

4.1 New Format of the Guidelines
The re-formatted Guidelines are now divided into Principles, Main Provisions and Guidance.
The Principles relate to:

4.1.1 Adopting remuneration policies and practices that promote the success of companies in creating shareholder value over the longer term;
4.1.2 Establishing remuneration committees comprised of independent directors, in accordance with the Combined Code;
4.1.3 Setting executive remuneration at appropriate levels and using external benchmarks with caution;
4.1.4 Linking executive remuneration to individual and corporate targets, aligning the interests of the executives with those of shareholders; and
4.1.5 Rewarding executives only when this is justified by performance.

The two sections that follow the Principles give more detailed Guidance in the areas of:
4.1.6 Remuneration committees and their responsibilities;
4.1.7 Base pay, bonuses, pensions and contracts and severance; and
4.1.8 Share-based incentive schemes.

4.2 Key Changes
The following gives a summary of the key substantive changes to the Guidelines which principally relate to Pensions and Share Schemes:

4.2.1 Performance periods - The Guidelines suggest remuneration committees should consider performance periods of "not less than" three years for options or other conditional share-based incentive schemes (paragraph 7.3). Changes may need to be made to existing schemes and consideration given to this area in the light of typical service periods for executives. The Guidelines also now recommend that where an executive leaves before the end of a performance measurement period as a good leaver or in the event of death, early vesting should be pro rated by calculation over the original measurement period, rather than the period of service completed (paragraphs 7.5 and 7.6).

4.2.2 Shares in subsidiaries - The guidance relating to options and other share-based incentives over the shares in subsidiary companies has been extended, suggesting that such incentives should only be granted in exceptional circumstances. The guidance sets out key considerations including: restricting such incentives to those whose time is fully allocated to the subsidiary; suitably challenging performance criteria; and disclosure of the accounting treatment, dilution limits, methodology for valuing shares, measure of volatility of option awards and entitlements to convert the subsidiary shares into parent company shares (paragraph 9.2).

4.2.3 Pensions - The Guidelines encourage remuneration committees to identify, review and disclose pension arrangements that give rise to large payments on severance or early retirement and ensure they are unacceptable in new contracts (paragraph 3.9).


If you require further information on any matter covered in this note, please contact your principal contact at Charles Russell or Simon Gilbert, Clive Hopewell or Alexander Keepin (London), Francis Rundall, Richard Norton, or Adrian Mayer (Cheltenham), Catherine Drew or Geoff Sparks (Guildford) or Peter Elliott (Oxford) on 0207 203 5000.

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Please note that the summaries above are a general indicative guide only. They are not exhaustive. This information has been prepared by the firm as a service to our clients. As it is a general guide, we recommend that you seek professional advice before taking action. No liability can be accepted by the firm for any action taken or not taken as a result of this information. The firm is not authorised under the Financial Services and Markets Act 2000 but we are able in certain circumstances to offer a limited range of investment services to clients because we are members of the Law Society. We can provide these investment services if they are an incidental part of the professional services we have been engaged to provide.