On 1 November 2019, the Investment Association (IA) published its annual list of over-arching principles and general guidance relating to executive remuneration. This sets out the issues that influence whether IA members will support a company's remuneration policy or approve the adoption or amendment of a particular share plan or incentive structure. These principles are intended to apply to companies listed on the London Stock Exchange's Main Market but may also be relevant for companies listed on other venues.
The areas of focus highlighted by IA members include the following:
- IA members increasingly view long term incentive schemes as ineffective and having the potential to result in concerning outcomes, such as increasing grant levels or volatile and significant vesting outcomes. Remuneration Committees are encouraged to evaluate the remuneration strategies to ensure they are aligned with the implementation of the company's strategy. IA members are also committed to working with stakeholders to see when alternative remuneration structures could be more widely implemented in the UK.
- Vested long-term incentives can lead to significant value being paid to a small number of individuals, which has a reputational impact on the company, its directors and shareholders. To address this, the discretion section of the Principles of Remuneration has been updated to include a suggestion that Remuneration Committees introduce discretion into their incentive schemes allowing them to limit the vesting outcomes if a specific monetary value is exceeded. Remuneration Committees should set the threshold and determine how it should be implemented on an individual basis.
- The IA's approach in 2020 will continue to reflect its underlying aim of aligning pension contributions for executive directors with the majority of the workforce.
- Companies should justify to investors the level of remuneration paid to executives. Members are particularly concerned about incremental increases to fixed pay and variable pay opportunity, which, on aggregate, can lead to substantial increases in overall remuneration.
- The IA's members' clients continue to seek explanations as to why remuneration pay-outs are supported. There must be transparency of financial, strategic and personal targets so that the link between pay and performance is clear. IA members request that strategic and personal targets and outcomes are separately disclosed.
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