The Investment Association has revised its Principles of Remuneration and written an open letter to the chairs of FTSE 350 remuneration committees. The Investment Association's initiative follows the final report, published in July, of the Executive Remuneration Working Group, an independent group established by the Association. The Group concluded that remuneration structures have become too complex and, because they adopt a "one size fits all" approach, do not necessarily reflect the company context and business strategy in a particular organisation.
The Association's new Principles of Remuneration have been amended to give remuneration committees greater flexibility to design structures that are appropriate to the company's strategy and business needs. There is a new section on improving investor shareholder engagement with the rationale for the company's remuneration structures.
The open letter also focuses on:
- Levels of remuneration – a majority of FTSE350 remuneration policies will be up for renewal in 2017 and the Association emphasises the need to have maximum limits on each aspect of variable remuneration – there should not be a need for discretions to provide payments outside the scope of the policy. There should be a greater explanation of justification, both the maximum potential remuneration set out in the policy and the payments actually made during the year in the context of the company's performance. Any increases to salary or variable remuneration should be justified with explicit rationale. The letter also says that companies should disclose pay ratios between the CEO and median employee and the CEO and executive team, although the Principles themselves actually describe these as just "useful reference points".
- Bonus disclosure – there should be full retrospective disclosure of threshold, target and maximum performance financial targets, the level of performance achieved against those targets and the resulting bonus. Failure to do so will result in an AGM "red top" report (the highest level of concern) from the Association's corporate governance advisory service. For personal or strategic targets, there should be a full explanation, not just the performance indicators. Again, failure to do this will lead to a report – this time "amber" level.
- Pensions – if contribution rates for executives differ from those for the rest of the workforce, these should be clearly justified.