For quoted companies, their main institutional investors have made their position clear. Companies should neither compensate executives for the extra tax they will have to pay, nor should they implement structures that seek to increase tax efficiencies should they result in additional costs to the company.
The institutional investors have also reminded remuneration committees to be aware of the potential damage to an employer’s reputation if it implemented certain types of arrangement.
So the 50% tax will not fundamentally change reward strategy. Employers will continue to adopt remuneration policies and practices that promote the creation of sustainable long-term value. However, employers will consider whether there are ways of delivering this in a more cost-effective way.
I would expect at least simple strategies to be explored, including tax deferral mechanisms, such as bonus deferral and the use of nil-cost options to deliver long-term incentive plan awards. HM Revenue and Customs-approved options are also likely to see a revival.
In the context of pensions, for higher-paid executives, cash alternatives will be more common. And assuming the tax advantages of employer-funded retirement benefit solutions (Efrbs) are withdrawn, some companies will try to use their purchasing power to enable executives to invest their post-tax income more efficiently. This would facilitate executives being able to save for their retirement outside the normal pension regime.
But, in my mind, none of the above amounts to a fundamental change in reward strategy; it is simply the same strategy being delivered in a more effective manner.
Bill Cohen is partner in the remuneration team at Deloitte