Investment Association publishes 2018 update of ‘principles of remuneration’

The Investment Association (IA) has published the 2018 update of its ‘principles of remuneration’ document (remuneration principles) and, in advance of the 2019 AGM season, highlighted certain items of focus.
The remuneration principles set out IA members’ views on the role of shareholders and directors in relation to remuneration and the manner in which remuneration should be determined and structured. They aim to provide a guide to shareholder expectations and good practice for companies with a main market listing but are also relevant to companies on other public markets, such as AIM, and other entities. 

The remuneration principles contains three principles (the principles), which concern remuneration policies, remuneration structures, and levels of remuneration. The principles are then supported by guidance to help remuneration committees apply the principles and ensure a proper level of shareholder protection. The guidance consists of sections which provide general guidance, guidance on fixed remuneration, and guidance on variable remuneration.

 

Changes for 2019

In the letter of introduction to the remuneration principles, Andrew Ninian (Director, Stewardship and Corporate Governance) sets out the key changes and highlights some items of focus for 2019. He explains that review of the remuneration principles took place against the backdrop of the introduction of the 2018 UK Corporate Governance Code and an increasing level of dissent on remuneration resolutions at FTSE 100 AGMs. He says that IA members have expressed frustration that many companies are not listening to investor views. As a result, investors have often felt forced to vote against companies' remuneration resolutions, which has led to a growing number of shareholder rebellions over the 2018 AGM season.

Under the updated remuneration principles, investors will expect companies to:

• pay pension contributions to directors in line with the contribution rate given to the majority of the rest of the workforce, rather than giving higher payments as a mechanism for increasing total remuneration

• broaden the triggers under which malus and clawback provisions can be used to forfeit or recover remuneration beyond the current triggers of ‘gross misconduct’ and ‘misstatement of results’, to make them a more effective tool to recover bonuses. There is also a requirement that companies should set out the process for implementing malus and clawback, not simply the triggers

• require directors to hold a proportion of their shares for a minimum of two years after their departure, so that they consider the long-term value of the company even after their departure, and

• adopt new pay ratio reporting requirements early, to maximise transparency over pay and ensure that there is accountability for high levels of pay internally

The updated remuneration principles also provide an update on investor expectations for those companies seeking to introduce a restricted share scheme and an outline of which shares can count towards the shareholding guidelines and the expectation of investors on post-employment holding periods.

2019 AGM season issues

In advance of the 2019 AGM season, the IA emphasises member concerns by reference to the following remuneration principles:

• investor and remuneration committee relations: IA members feel that too often remuneration committees are overtly considerate of the management perspective, at the expense of shareholder opinion. Rather than solely considering the contractual requirements for making a remuneration payment, investors expect directors to consider the broader employee pay context (as per the emphasis of the 2018 UK Corporate Governance Code and the pay ratio reporting requirements)

• shareholder engagement: consultation with shareholders should focus on major strategic remuneration issues and provide shareholders with full details of the complete remuneration structure

• new pay ratio reporting requirements: supporting the introduction of reporting requirements (coming into force from 1 January 2019 with most companies required to report against them in 2020 annual reports), the IA encourages companies to report their pay ratios in 2019 (adopting option A)

• levels of remuneration: IA members are concerned that remuneration committees should show restraint in overall remuneration (both fixed and variable pay), and

• pay and performance: IA members expect robust transparency on financial and non-financial targets to demonstrate the link between pay and performance.

Sources: High pay under fire in toughened investor rulesThe Investment Association Principles of RemunerationLetter of introduction for Principles of Remuneration

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