The Investment Association has made significant changes to its Principles of Remuneration in response to the publication of the Executive Remuneration Working Group’s final report in July.

Background

The Investment Association (IA) and its predecessor organisations have for many years published guidelines setting out the issues that will influence its members in deciding whether or not to support a company’s remuneration policy or approve the adoption or amendment of a particular share plan or incentive structure.

The Executive Remuneration Working Group was established by the Investment Association in 2015 as an independent panel to address the concern that executive remuneration has become too complex and is not fulfilling its purpose. The core recommendation in the ERWG’s final report was that there needs to be increased flexibility for companies to choose the remuneration structure that is most appropriate for their business in response to the concern that there is a single one-size-fits-all model for executive remuneration in the UK to the exclusion of other possible structures. The ERWG’s report was the subject of a previous Equity Issues published at the beginning of August.

The principles of remuneration

Following the publication of the ERWG’s report, the IA has updated its Principles of Remuneration, some of which have been significantly rewritten, and some new guidance has been added. The main changes are:

  1. The Principles have been slimmed down to a set of high level issues and have been updated to reflect the recommendations of the ERWG;

  2. The Principles have also been amended to acknowledge the need for increased flexibility of remuneration structures;

  3. The Principles and Guidance have been updated to ensure that they do not promote a single remuneration structure;

  4. The Principles have been updated to ensure that the level of remuneration has appropriate focus and that companies should disclose pay rations between the CEO and median employees and between the CEO and the executive team to provide the context of the remuneration provided;

  5. The Guidance includes a new section on the importance of improving shareholder consultation, ensuring that it is based on the strategic elements of remuneration and leads to consultation rather than affirmation of the company’s position. There is a new obligation for companies to engage with shareholders if they receive a 20% or more vote against a remuneration proposal so as to understand why shareholders are opposed and to take measures to rectify shareholders' concerns;

  6. Post retirement shareholding guidelines have also been encouraged and there is a new requirement for directors to continue to hold shares after they leave a company; and

  7. There is new guidance on restricted share awards requiring companies to reduce award sizes by at least 50% to allow for the greater likelihood of the awards vesting. The awards should vest over a period of at least 3 years, following by annual vesting over a period of time. The IA acknowledges that not all shareholders are keen to support restricted share awards, as they consider that it weakens the link to long-term performance.

Next Steps

The Investment Association believes that the Principles and Guidance continue to provide a useful guide to shareholder expectations and good practice, but that it is crucial that close dialogue between companies and their shareholders continues. It also points out that its members expect, as a minimum, for companies to follow the requirements relating to remuneration in the Companies Act 2006, Reporting Regulations, the UK Corporate Governance Code and the Listing Rules and where companies are not subject to these regimes, they should apply similar high standards.