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Freshfields Risk & Compliance

| 5 minutes read

UK Investment Association sets out expectations for the 2022 AGM season

The Investment Association (the IA) publishes and periodically updates a set of principles on executive remuneration and long-term incentives, including the structure and operation of employees’ share schemes. The IA principles predominantly apply to listed companies but are also relevant to companies listed on other exchanges, including AIM. Last week, the IA published its updated principles of remuneration (the 2022 Principles) together with a letter to remuneration committee (RemCo) chairs setting out expectations for the 2022 AGM season. This blog post highlights the most notable changes in the 2022 Principles.

General guidance

  • Levels of remuneration. The IA is understandably hot on levels of remuneration. Previously, the IA required companies to explain why the chosen maximum remuneration level was appropriate. The 2022 Principles go one step further, by requiring a clear rationale to be provided for any significant increase to any element of remuneration. The IA has not explained what it means by ‘significant increase’, so companies will need to determine this on a case-by-case basis. Further, the 2022 Principles expect RemCos not only to show restraint in relation to total compensation, but also to consider how any potential increases to salary levels will affect overall quantum, taking into account the ‘multiplier effect’.
  • Malus and clawback. The 2022 Principles make clear that malus and clawback triggers should be more extensive than purely gross misconduct and misstatement of results (although the IA acknowledges that triggers will vary depending on the company). Alongside this, the IA expects a company’s annual report to set out how it intends to enforce malus and clawback triggers in the event that they are needed. Companies may wish to work with their legal advisers to review their malus and clawback arrangements and ensure that they will be effective in practice.
  • Discretion. The IA has made clear in the 2022 Principles that discretion should not only ensure that outcomes of executive pay schemes properly reflect overall corporate performance and the experience of shareholders in terms of value creation, but also wider stakeholders and the general market environment. This language precedes a new sentence in the 2022 Principles, which requires RemCos to disclose how they have considered the experience of material stakeholders when operating discretion.

Fixed remuneration

  • Base pay. Where RemCos sought to increase base pay, earlier iterations of the principles required them to fully disclose the reasons for doing so, justify those increases and align them with increases awarded to the wider workforce. Now, increases no longer need to be aligned with those granted to the wider workforce. However, any increases in base pay beyond the increase awarded to the wider workforce will trigger full disclosure of the reasons and justifications for doing so. Further, the IA has previously frowned upon the chasing of a ‘perceived median’ level of salary across peer companies. The 2022 Principles make clear the IA’s view that vague references to ‘market level’ are a major contributor to spiralling levels of pay, and emphasise the fact that IA members do not consider salary increases justified solely by benchmarking to be appropriate.

Variable remuneration

  • Annual bonuses. ESG metrics have been covered by the IA before but the language in the 2022 Principles is more imperative. Where companies incorporate the management of material ESG risks and opportunities into their long-term strategies, RemCos should consider the management of those risks as variable remuneration performance conditions. The 2022 Principles also introduce a new requirement that those performance conditions are quantifiable. This is a theme we are seeing across a variety of institutional investor guidelines, with Glass Lewis most recently expanding its discussion of ESG initiatives in its 2022 UK proxy voting policy guidelines and ESG initiatives policy guidelines. Moreover, companies should disclose within their remuneration reports why their RemCos are satisfied that bonus pay-out is appropriate, taking into account the wider stakeholder experience, particularly that of shareholders and employees.
  • Restricted share awards. The 2022 Principles acknowledge that restricted share plans are sometimes introduced in situations where a company has experienced a substantial fall in its share price. In such circumstances, the IA requires RemCos to be particularly mindful of the potential for windfall gains when considering the initial grant of restricted shares. It does this by asking RemCos to review each year if the grant level is appropriate given the company’s financial and share price performance. Where there have been reductions in the share price, awards should be scaled back at grant to avoid windfall gains.
  • Value creation plans. Given the increased adoption of value creation plans (VCPs) over the last year, the 2022 Principles include a specific section on investor expectations in relation to VCPs. In particular, the IA states that RemCos should set an overall cap on the number of shares and monetary value that can be delivered under a VCP. The strategic rationale for a VCP also needs to be clearly articulated to shareholders.
  • Grant size. A company’s RemCo has previously been required to review the appropriateness of the grant level each year, taking into account the company’s financial and share price performance. The 2022 Principles now reflect investor preference for companies to reduce awards at grant where share prices have fallen, rather than relying on discretion when awards vest.

In addition to the key changes listed above, the IA’s accompanying letter to RemCo chairs makes clear that the IA’s April 2020 guidance on shareholder expectations during the Covid-19 pandemic remains relevant as we move into the 2022 AGM season. Also, while it remains consistent with what the IA has been saying for a few years now, it is important to note that the 2022 Principles introduce a longstop date for the contribution rates for incumbent executive directors to be aligned to the contribution rate available to the majority of the workforce – 31 December 2022. The IA states that it will red top any new remuneration policy that does not explicitly state that any appointed executive director will have their pension contribution set in line with the majority of the workforce as well as any remuneration report where executive pension contributions are not aligned to the majority of the workforce rate or there is not a credible action plan to align pension contributions by the end of 2022.

Companies should review the revised principles, together with guidelines produced by other institutional investors, and identify any required changes to their current arrangements in anticipation of the 2022 AGM season. While the 2022 Principles (as with all investor guidelines) are non-statutory, they are often regarded as a key barometer of what constitutes best practice and good corporate governance and ultimately, institutional investor approval of remuneration arrangements is necessary at various points throughout a listed company’s lifecycle, most obviously during votes on the directors’ remuneration report. Companies have previously sought clarification from some institutional investors in relation to specific remuneration proposals, but even more emphasis may be placed on the guidelines going forwards. It was recently reported that Legal and General Investment Management, the UK’s largest asset manager which publishes principles on executive remuneration similar to the IA principles, will cease almost all direct feedback to companies on their executive pay after finding that its responses are frequently ignored by companies. It remains to be seen how companies will respond to the 2022 Principles, but compliance with them should help to avoid a hostile response from shareholders.


corporate governance, europe, employment