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Freshfields Risk & Compliance

| 3 minutes read

UK Investment Association sets out expectations for the 2023 AGM season

On Wednesday 9 November, the Investment Association (the IA) published its updated principles of remuneration (the 2023 Principles) together with a letter to remuneration committee (RemCo) chairs setting out expectations for executive pay within listed companies for the 2023 AGM season. The 2023 Principles aren’t significantly different from last year, but the areas of focus identified in the letter to RemCo chairs should be noted carefully. This blog post summarises the key points.

Cost of living crisis

  • The primary focus of the 2023 Principles and accompanying letter is the need to delicately navigate the cost-of-living crisis and inflationary pressures and the need to incentivise executives. The IA warns RemCos against making excessive awards to their executives at a time where many lower-paid employees are forced to make significant sacrifices. Whilst the 2023 Principles refer to employees, the letter extends this to include vulnerable customers, suppliers and other major stakeholders. Restraint should be shown in executive director salary increases (particularly as these increase the value of variable pay opportunities). Where salary increases are required, the IA encourages RemCos to consider increases below the rate of salary increases given to employees. The wider economic position should also impact the approach RemCos take to performance outcomes and targets for variable pay.

NED fees 

  • The IA recognises that non-executive director (NED) fees have not always reflected the increased complexity and time commitment expected of their role. Given the important role they play in companies, the 2023 Principles support NEDs receiving fees that reflect the time commitment, scope and complexity of their roles, taking into account the fact that NEDs will frequently have roles on sub-committees as well as on the board. However, the 2023 Principles make clear that any increases to NED fees should be properly justified.

Fixed remuneration

  • Base pay. In addition to the point above about salary increases, where an executive is recruited on a lower salary than the incumbent, perhaps to reflect the candidate’s experience or their anticipated development in the role, the company should publicly communicate the intended salary path for that individual, including timeframes for increases.
  • Pensions. As will be familiar, executive pension contribution rates should be aligned with those available to the majority of the workforce by the end of 2022. If any executive director has a pension contribution above the level of the majority of the workforce, the IA will ‘red top’ the remuneration policy or report (as applicable).

Variable remuneration

  • ESG targets. In the 2023 Principles the IA continues to encourage companies to integrate ESG metrics into variable remuneration arrangements where the management of material ESG risks and opportunities is incorporated into their long-term strategies. The IA acknowledges that companies are still trying to formulate ways of measuring and reflecting ESG targets in variable pay. Where such strategies are a ‘work in progress’, RemCos should articulate their thinking and their future plans for adoption. If ESG targets are used, they should be material to the business, clearly explained and suitably stretching. ESG performance measures should not reward ‘business as usual’ activity, nor should they be used as a vehicle to increase overall quantum.
  • Performance conditions. The IA also emphasises that RemCos should be conscious of the collective impact of performance conditions, to ensure that there is a balanced assessment of company performance and they expect there to be appropriate natural tension between conditions. Whilst the wording of the 2023 Principles could be clearer, we believe this simply means that performance conditions should test different aspects of the business (such that exceptional performance against one condition does not necessarily mean that all other performance conditions are met).  
  • Windfall gains. During the Covid-19 pandemic, the IA cautioned that windfall gains could arise if share grants were granted following a substantial fall in share price. Where restraint was not exercised during the pandemic, and windfall gains would arise in 2023 vesting outcomes, RemCos should consider exercising discretion to reduce vesting levels. The 2023 Principles say that RemCos should clearly articulate how they have considered the impact of any potential windfall gains in determining vesting outcomes and how they have exercised any discretion.

The 2023 Principles are non-binding, but they are regarded as best practice. They will be more significant in 2023 when a large number of listed companies will be seeking their three-yearly approval of their remuneration policy. Companies should carefully review the 2023 Principles and RemCo chair letter, alongside other institutional investor guidelines, to identify any required changes to their current arrangements.


employment, corporate governance, incentives, esg