The Investment Management Association (IMA) has taken over responsibility from the ABI for publishing Principles of Remuneration on behalf of institutional investors. The IMA's 2014 Principles, which replace (and, to a large extent, replicate) the 2013 ABI version, set out views on the structure of executive pay and the roles of shareholders and the remuneration committee.
The new version includes a statement that the IMA does not support the use of allowances as part of fixed pay, as it considers that they are "inconsistent with the spirit of simplicity, clarity and pay for performance", and that company remuneration committees should "clearly justify" and explain why they thought any allowances were necessary in the context of the overall remuneration package. We mentioned last week that the European Banking Authority has recently published a report investigating whether role-based pay is being correctly categorised in the light of the cap on bonuses in the banking sector.
In a covering letter to chairs of remuneration committees, the IMA mentions some other executive pay issues of particular concern to shareholders in the wake of the recent changes to remuneration reporting:
- Investors continue to have concerns about the overall amounts (and level of gearing) in variable pay and will continue to scrutinise closely any proposals to increase variable pay.
- The reasons for increased maximum variable pay should be explained: an increase in the size of the company is not in itself a sufficient rationale.
- In normal circumstances, basic salary increases should not exceed inflation or the increase for the workforce as a whole.
- Investors look at the absolute amount paid for the achievement of threshold performance, not just the proportion of the award which vests.
- Committees should consider adopting longer length of performance/holding periods for long-term incentives.
- Members will not support retrospective changes to performance conditions to take account of recent movements in exchange rates – the management of exchange rate risks is part of an executive's role.