In brief

IA Remuneration Committee Chair Letter and 2023 Principles of Remuneration

On 9 November, the IA published its revised Principles of Remuneration for 2023, together with its letter to Remuneration Committee Chairs. The IA urges Remuneration Committees in 2023 to be mindful of the cost of living crisis and inflationary environment and encourages Remuneration Committees to exercise similar restraint and good practice displayed during the COVID pandemic in determining 2022 outcomes and remuneration approach for 2023. Any increase to variable pay opportunities in 2023 will need to be clearly explained in the context of the wider stakeholder experience. Shareholder engagement in 2023 will be critical.

In particular, Remuneration Committees are encouraged:

  • Fair pay: To consider the experience of stakeholders, employees and those most impacted by the cost of living crisis (including vulnerable customers, suppliers and other major stakeholders) when setting and deciding executive pay. Performance metrics and drivers should be explained to shareholders in the context of the wider stakeholder experience when determining overall performance.
  • Salary increases: To deviate from normal principles and not award salary increases for executive directors in line with inflation or salary increases given to other employees on the basis that the inflationary pressure is disproportionately affecting lower-paid workers. Further, given the leveraged nature of executive remuneration packages, inflationary salary increases will have a greater impact on the overall remuneration package and quantum which may not be appropriate in the current circumstances.
  • Windfall gains: To ensure that level of vesting is appropriate and potential windfall gains are avoided by considering whether the level of vesting should be reduced. If RemCos decide not to adjust windfall gains, the IA expects such companies to clearly explain the rationale for their decision.
  • ESG metrics: To ensure that ESG metrics are linked to company strategy, quantifiable, suitably stretching and avoid unnecessary complexity. The IA expects RemCos to explain how progress against the metrics is measured and how performance against the goals will be disclosed. Further, ESG metrics should not be used as a vehicle to increase overall quantum nor reward executives for "business as usual" activity.
  • Pensions: For 2023, IVIS will "Red Top" any remuneration policy or report where executive pension contributions are not aligned to the majority of the workforce (even for incumbent directors).

Whilst little substantive change has been made to the Principles of Remuneration for 2023, RemCos should note the following:

  • Non-Executive Director pay: The Principles have been updated to set out investor support for NED fees to reflect the reality of the time commitment, complexity and skillset required for their role. Further, the IA has confirmed that it is supportive of companies establishing minimum shareholding requirements for its NEDs, NEDs should not receive variable incentive awards.
  • Executive pay: The experience of key stakeholders should be considered when setting and deciding executive pay. Further, RemCos should consider using their discretion to ensure that executive pay properly reflects executive performance and contribution, as well as being commensurate to wider stakeholder experience and pay levels and conditions across the entire workforce.

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