No matter whether you are a listed company or a private company, the most recent remuneration guidelines from the Investment Association are likely to affect your business in the future

November 20, 2019

To paraphrase an old saying, “when the FTSE sneezes, the rest of the market catches a cold”.  Whilst the recent publication of the Investment Association’s Principles of Remuneration (“the Guidelines”) on 1 November is targeted initially at the largest listed companies, we have consistently seen practices and outlooks move into other listed and non-listed companies.

As a result, here are four particular points made by the IA which we think every business should be aware of going forwards.

  • LTIPs

The IA has indicated that alternatives to Long Term Incentive Plans (LTIPs) should now be actively considered.  This statement can be confusing as the IA is not suggesting that rewards based on long term performance should be stopped – it is rather that the default position for companies should not be to use “Nil/Nominal Cost” Options.

A discussion of the potential alternatives will be undertaken in a future article.  The key detail coming from this advice is the reiteration that any long-term plan for executives and key personnel should be aligned to the company’s strategy.  It is, therefore, acceptable to use a style of plan which is not common amongst peers or comparators if it would be the best type of structure for your business and is aligned to company strategy.

  • Pension Contributions

There is a strong and consistent message that senior executives should not receive higher pension percentages than the majority of their workforce.  No new Directors should be awarded pension contributions above this level (typically expressed as a percentage of salary) and any incumbent directors should have their percentage reduced down to the same level as the rest of the workforce by the end of 2022.

  • Remuneration Committee discretion and capping variable pay

Whilst the Guidelines acknowledge that the Remuneration Committee may need to exercise discretion at particular times, the indication and examples used are all in respect of using discretion to limit payments and it is clear that this is the expected direction of travel.

In particular, there is an encouragement to not pay any variable pay at all if there has been “an exceptional negative event” (such as a significant health and safety failure or a poor outcome for clients).

There is also a suggestion that variable pay should be capped at a maximum – to be set for each Company by its own Remuneration Committee.

  • Notice Periods

Payments to exiting Directors should be limited to what is in the contract (i.e. no “ex-gratia” payments) and be limited to salary, pension and benefits already in the contract.  Where bonuses are due, these should only be paid if the individual is a “Good Leaver” and the Remuneration Committee should state on what basis this definition is made.

Only time will tell if these new approaches will flow down to the rest of the market as a trickle or a surge. However, the continued tone is one of greater restraint over executive pay.

For further information or to discuss any questions you may have, please contact Stuart James.

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