Investment Association to update Principles of Remuneration

Given the Investment Association did not issue their usual annual update to their Principles of Executive Remuneration last autumn (in time for remuneration reports preparation and the AGM season), the IA have now written to FTSE 350 companies’ remuneration committee chairs, reviewing the 2023 season and setting priorities for 2024. Following engagement with companies, the IA plan to review and publish simplified, updated Principles later in 2024.

According to the IA, in 2023 reports, remuneration committees responded effectively to investor expectations particularly on the cost-of-living crisis, windfall gains and using discretion to reduce outcomes. The committees recognised the impact of significant salary increases on total remuneration for executives, and gave detailed information on the how all employees were treated. Given ongoing inflation, the IA expects companies to remain cautious in 2024, and again show how they have considered salary increases for executives in the context of all-employee salary increases, the impact on total remuneration for the executives and putting their pay in the context of the stakeholder experience. Remuneration committees should demonstrate how remuneration outcomes are appropriate in view of achieved performance, and how the committee has set targets for 2024.

The IA also welcomed the ongoing public debate on competitiveness of the UK listing environment and UK remuneration practices, and report the following themes emerging from roundtable meetings with nearly 100 FTSE350:

Quantum: There is a need for more flexibility to offer higher LTIP awards to create a competitive remuneration structure. Particularly for the largest UK companies and those with significant US presence or revenues, there are challenges in attracting US executives and competing in the US market.
Global companies wish to operate hybrid schemes (with both performance and restricted shares), which are used in the US and other jurisdictions, again for competitiveness reasons.
Corporate Governance Code impact: The cumulative effect of Code requirements to have post-vesting holding periods, shareholding requirements (including post-employment) and malus / clawback provisions is disproportionate and is perceived to reduce the value of remuneration. (Individually, these requirements are accepted as mechanisms increasing the long-term alignment of executives and shareholders.)

Following these roundtables, the IA reports feedback that the Principles are helpful in giving the aggregate views of shareholders and setting appropriate expectations for companies. But the guidance which underpins the Principles could be simplified to remove prescription and duplication with the Code.

The IA emphasises that the Principles of Remuneration are principles (not rules), setting out the important issues that investors consider when evaluating a company's remuneration structure, but also allow companies to understand the approach that shareholders are most likely to support. When choosing the most appropriate remuneration structure for their business, companies should engage with shareholders to achieve an understanding and hence support. The IA refer to their underpinning principle that “remuneration policies should promote long-term value creation through transparent alignment with the agreed corporate strategy."

In view of the feedback the IA intend to fundamentally review and simplify the Principles to ensure that they are supporting a competitive market and delivering the right outcomes for shareholders and any end-clients, with the revised Principles to be published later in 2024.

Published 28 February, 2024