Many FTSE companies are likely to seek shareholder approval for new pay policies in 2020. With that in mind, the Investment Association’s updated Principles of Remuneration emphasise that remuneration committees must consider the wider employee pay and fairness of executive pay when setting remuneration levels and deciding on pay outs. 

The guidelines revise certain features of executive pay, focussing on fairness and restraint. These include monetary caps, approach to leavers, pensions, remuneration structures, and performance conditions. 

This briefing considers the changes in detail. Click here for a version of the guidelines showing the changes from last year, and here for the IA’s letter to RemCo chairs.

Levels of pay

The guidelines say that companies need to justify adequately the level of executive remuneration and increases to salary and variable pay. Investors continue to be concerned with incremental changes which can result in large increases overall. The guidelines now also require that following a fall in share price, grants are scaled back. 

In particular RemCos should consider having discretion in incentive plans to cap vesting to a specific monetary value. It’s up to RemCos to decide on an appropriate level and how it would be implemented in individual cases. This corresponds with the FRC Guidance on Board Effectiveness suggesting that RemCos consider setting a monetary limit on what they consider a reasonable reward for individual executives. But not many companies have so far introduced such caps on levels of vesting. 

RemCos should have appropriate discretion to ensure that pay outcomes correspond to company performance and are not excessive. This follows provisions in the Corporate Governance Code 2018 and in the FRC Guidance about overriding formulaic outcomes and being aware of possible monetary outcomes of grants. 

The guidelines already urged RemCos to use discretion to ensure variable pay reflected overall company performance, and not pay out even if specific targets are met, if “the business has suffered an exceptional negative event”. This has now been expanded to refer to events impacting stakeholders including the workforce. Examples given include a significant health and safety failure or a poor outcome for clients. These changes match the addition to guidelines on malus and clawback. These now refer expressly to the FRC Guidance list of malus/clawback circumstances, including serious reputational damage and corporate failure. RemCos are clearly under increasing pressure to ensure there’s no payment for failure.

Departing directors

A new section in the guidelines states that only contractual payments in lieu of notice should be made. They should only cover salary, pensions and benefits, and reflect the notice period. The notice period should start immediately when it's been decided that an executive has resigned or the board has decided that an individual is leaving the company (even if the written notice required by a service contract has not yet been given/received).

Only good leavers should get annual bonuses, and deferred bonuses should continue as normal (i.e. paid in shares, and on the usual deferral timetable). Companies should disclose if a director is a good or bad leaver and the reasons for this status.

Companies will need to review contractual arrangements with directors for compliance with these requirements. Having these provisions just in the pay policy will not assist. They should also be borne in mind when negotiating exit arrangements with individual directors. The terms of any deferred bonus plan should also be checked, for example to ensure former directors can continue to participate.  


The guidelines refer to the IA’s September position paper (click here for details) and reiterate the requirement to have a “credible plan” to reduce existing directors’ pension contribution rates to those aligned with the majority of the workforce. They do not refer to the IVIS red and amber top warnings, though it’s clear these will apply for 2020 AGMS. 

Executive shareholdings

The general principle on this now requires executive directors to build “significant” (replacing “high”) levels of personal shareholding, through personal investment (not just through vesting of share awards, as previously stated). Legal & General Investment Management have recently amended their executive remuneration guidance to require personal investment by directors to build up shareholding, so this may become a more general investor requirement. 

The letter to RemCo chairs makes it clear that new 2020 policies should now include post-employment shareholding requirements (there’s no change in the minimum two-year period). 

Alternative remuneration structures to LTIPs

The letter to RemCo chairs highlights investors’ concerns with “traditional” LTIPs, including increasing grant levels and volatile and significant vesting levels. RemCos are encouraged to evaluate their remuneration structures to ensure suitability for alignment with the company’s strategy. The IA say investors commit to working with companies to explore when alternative structures may be more appropriate, and will support them if RemCos can demonstrate their strategic benefits. The IA may revise its Principles of Remuneration after the AGM season to reflect any developments. 

Several changes to the guidelines reflect this: more detail on restricted share plan expectations, and ‘downgrading’ the language around LTIPs. They are now described as “an effective way to align” shareholders’ and participants’ interests (previously LTIPs were described as “the most effective way”). 

Performance conditions

Investors would like to see robust transparency on financial, strategic and personal targets to make the link between pay and performance clear. For annual bonuses, the guidelines state that the weightings, achievements and outcomes of personal and strategic objectives should be disclosed separately. 

There is now an expectation that RemCos consider including strategic or non-financial performance criteria in variable remuneration, such as ESG objectives. Previously this was just a suggestion. 

Shareholder consultations

The forward to the guidelines bemoans the fact that discussions about remuneration at times crowd out other important discussions between companies and shareholders, and that the dialogue has become, in some cases, a drawn out process. There’s a reminder that despite any such discussions, shareholders will make their voting decisions only when the annual report is published as that is when they have the full disclosure on remuneration and the company’s performance.

The guidelines now include an explanation of the role of IVIS during any consultation: to help investors in identifying key changes and areas where more information is needed. The IA say that their members support their involvement in the consultation, to aid members’ own analysis. At the end of the consultation process, a RemCo should send shareholders consulted a letter setting out the final approach the RemCo will be taking.