UK Investment Association releases latest remuneration principles and guidance

The Investment Association has announced the release of its latest Principles of Remuneration ('the Principles') setting out its members’ expectations on the framework for executive pay.

Alongside the updated Principles, the IA has also updated the guidance it published in April 2020 for remuneration committees considering pay in response to the pandemic.

The Principles of Remuneration

The Principles themselves are largely unchanged from the 2019 version – although there are some small but important changes as follows:

• Shareholding requirements: there is no change in the level of shareholding expected by the IA. However, there is a clearer call for companies to explain how they are able to enforce shareholding requirements – in particular, post-employment shareholding requirements.
• Bonus metrics: the Principles include a reminder that the 'significant majority' of annual bonus should be determined by reference to financial metrics (rather than personal objectives or strategic targets).
• ESG targets: the Principles accept that ESG targets may be appropriate where they are intrinsic to corporate strategy.
• Bonus deferral: where bonus opportunity is in excess of 100 per cent of salary, the requirement to apply deferral to a portion of the bonus should apply to the entire bonus and not just the element above 100 per cent.
• Pension: the end of 2022 remains the deadline for aligning existing director pension contributions to the contribution rate available to the majority of the workforce. IVIS will red top any company that does not have a credible plan to achieve this where the contribution is 15 per cent or more.

Updated guidance

While there is not much new or surprising in the Principles, the updated guidance will be a more interesting read for remuneration committees. The overarching message is that remuneration committees should be thoughtful in their decision making on pay matters this year and ensure that pay outcomes align with the experiences of shareholders, employees and other stakeholders.

Specific points for remuneration committees to consider are as follows:

• 2020 bonus payouts should be nil if a company has accessed government support (including under the Job Retention Scheme) or raised additional capital from shareholders, unless there are 'truly exceptional circumstances'. The remuneration committee should disclose how it has dealt with the impact of other government support measures (such as business rate relief) on performance outcomes.
• Bonuses should be reduced where dividends were reduced or cancelled for FY2019 – either through malus applied to any 2019 bonus that has been deferred into shares, or a reduction in 2020 bonus awarded.
• The IA continues to regard any change in performance targets in light of the pandemic as inappropriate and is asking that remuneration committee chairs include an appropriate negative statement in the DRR that targets have not been adjusted.
• There is a continued focus on avoiding windfall gains under LTIP awards and so companies will need to explain whether (and if so, how) they have reduced grant sizes and what approach they have taken to setting long term performance measures. The guidance discourages companies from making grants at maximum opportunity to combat falling share prices.
• The IA does not regard a move from performance based LTIP awards to restricted share awards as an appropriate response to the difficulties associated with setting long term performance conditions. Where a company considers the move appropriate for wider reasons, the IA expects that remuneration committees will still consider whether reduced grant levels are necessary to avoid a windfall gain for executives.
• There is a strong suggestion that the 2021 AGM season may not be the most appropriate time to introduce significant changes to directors’ remuneration policies but that more minor changes to align policies with best practice and the latest governance standards should still be made.