On 1 November 2019, the Investment Association (the “IA”) published the updated IA Principles of Remuneration (the “Principles”) setting out investors’ expectations on executive remuneration for the 2020 AGM season. The updates are especially pertinent as many companies are due to seek shareholder approval of a new remuneration policy in 2020. If you would like assistance on the review of your remuneration practices, please contact Alice Greenwell, Regina Erie, or your usual Freshfields contact.
Key updates and areas of focus are as follows:
- Discretion to limit vesting: remuneration committees should consider introducing discretion into their incentive schemes to limit vesting outcomes if a specific monetary value is exceeded. Committees can decide on the level at which the discretion would be exercised and how it would be implemented on an individual basis. Shareholders discourage payments being made to executive directors where the business has suffered an exceptional negative event, even if the specific targets have been met.
- Reduction of incumbents’ pension contributions: last year, the Principles outlined the IA’s expectation that pension contributions for executive directors are aligned with the majority of the company’s workforce. Continuing with that focus, the IA now expects remuneration committees to set out a credible action plan to align pension contributions for incumbent directors with the majority of the workforce by the end of 2022. Companies are expected to disclose the pension contribution rate to the majority of the workforce and explain how this rate has been derived (e.g., average of all employees, UK employees, etc.).
- Leaver provisions: the IA expects that a leaver’s notice period should commence “immediately when a decision has been made that an executive has resigned or the board has decided that an individual is leaving the company”. Payment in lieu of notice should be limited to salary, pensions and any contractual benefits and reflect the length of the notice period, and annual bonuses should only be paid to good leavers with any deferral in shares on the normal deferral schedule.
- Post-employment shareholding: the Principles last year outlined investors’ expectations on post-employment shareholding requirements and the counting of shares for the purpose of the requirements. Companies are expected to introduce to their new policy approvals post-employment shareholding requirements of at least two years.
- Alternatives to traditional LTIP: the IA is increasingly of the view that traditional long-term incentive schemes are not working as effectively as they could for all companies and so is open to remuneration committees exploring alternative remuneration structures that are aligned with the company’s strategy.