The Investment Association’s updated Principles of Remuneration for 2022 AGM season place more pressure on remuneration committees.

December 7, 2021


On 18th November 2021, the Investment Association (IA) wrote a letter to the chairs of the remuneration committees (Rem Com) in the FTSE 350 outlining its updated principles of remuneration and highlighting IA members’ focus areas for the 2022 AGM season.

The main changes to the IA principles are as follows:

General Guidelines

  • Levels of remuneration – Excess pay is discouraged. Shareholders expect a clear link between pay and sustainable long-term value creation. Remuneration disclosures should specify points of reference against which the appropriateness of pay quantum can be judged. Reference points include:

(i) a stated policy linking remuneration to overall corporate performance
(ii) remuneration policy as a whole
(iii) fairly constructed peer groups which are disclosed to investors
(iv) the remuneration paid to lower, median and upper quartile workforce of the company through the use of pay ratios. Pay levels should be justified to investors and remuneration committees should show restraint in overall quantum. Moreover, the effect of a salary increase on total remuneration should be considered because an increase in salary, in most cases will have a ‘multiplier effect’ on the overall level of remuneration.

  • Malus and Clawback – Malus and clawback provisions should be agreed and documented before bonus or long-term awards are made. They should be enforceable and consistent as between LTIP and bonus rules, remuneration policy and employee contracts. The annual report should explain how these provisions would be enforced. Triggers must be more expansive than gross misconduct and misstatement of results. While triggers will vary depending on the company, they should be clearly disclosed to shareholders. Remuneration committees should develop clear processes for assessing executives against malus and clawback criteria.
  • Discretion – The exercise of discretion by remuneration committees can ensure that the outcomes of executive pay schemes properly reflect overall corporate performance, shareholders’ experience in terms of value creation, wider stakeholders’ interests and general market conditions. Rem Coms should exercise discretion diligently, in keeping with shareholders’ interests and should be held accountable for the way discretion is used. Remuneration committees will be required to disclose the level of discretion in their annual remuneration statement.

Fixed Remuneration

  • Base Pay – Increases in base salary beyond the increase awarded to the wider workforce should be justified and the justification disclosed. The IA does not consider salary increases solely by benchmarking as appropriate. The ‘multiplier effect’ of an increase in base salary on total remuneration should be considered.
  • Pensions – Contribution rates for incumbent executive directors should be aligned with rates applicable to the wider workforce by 31 December 2022. Payments in lieu of pension scheme participation should be disclosed and treated as a separate non-salary benefit. Discretionary changes to pension benefits should be justified and disclosed.

Variable Remuneration

Annual Bonuses – Annual bonuses should be clearly linked to business targets through the financial and strategic KPIs. The IA observed that a greater number of companies are incorporating material Environmental, Social and Governance (ESG) risks and opportunities into their long-term strategy. By incorporating material ESG risks as performance conditions in executive incentives Rem Coms can help ensure remuneration policy plays an important role in and is aligned with the company’s risk management strategies. Research by MM&K and our partners in the GECN, plots global trends in the inclusion of ESG metrics in executive incentives. The latest research report will be available in the New Year. To reserve a copy, click here.

•  Restricted Share Awards – Shareholders want to see:

(i) Strategic rationale – reasons why restricted shares are considered to be appropriate
(ii) Discount – a significant reduction in award size, reflecting the greater certainty of vesting compared to PSPs
(iii) Discretion and Underpin – Rem Com discretion on vesting outcomes, for example, to avoid windfall gains; and some shareholders also require a  quantitative performance underpin
(iv) Vesting and holding periods –at least five years plus a holding period of at least two years post vesting/retirement
(v) Previous approach – shareholders will be “suspicious” of proposals to adopt restricted share plans where existing incentives have been delivering appropriate outcomes.

Restricted share awards have been borrowed from the US practice of awarding restricted share units, which vest based on elapsed time. Vesting is not subject to other performance conditions. In principle, therefore, it is not unreasonable to expect restricted share awards to be smaller than PSP awards, to recognise the greater certainty of vesting but the appropriate level of discount will depend on the remuneration philosophy and package design of each company. Moreover, adding a quantitative performance metric to a restricted share award changes the characteristics of the award, converting it into a watered-down PSP award.

•  Value Creation Plans (VCPs) – Shareholders want to see:

(i) The strategic rationale – because VCPs are viewed as being non-standard, to be adopted only where there is a clear rationale for doing so
(ii) An overall monetary cap on the number of shares and total value of awards that participants may receive
(iii) Targets –targets should be “substantially more stretching” than for other long-term incentives and robust
(iv) Dilution – Rem Coms should be aware of the heightened risk of large levels of dilution.

We question why the IA has adopted this stance towards VCPs.  Economically, a VCP produces a similar result to a share option, assuming it is share settled. But options are not ordinarily subject to a monetary cap – if the market value of a share increases, both shareholders and option holders benefit proportionately.  VCPs upon which MM&K has advised operate within the guideline dilution limits applicable to all equity-settled incentives adopted by quoted companies.

General comment

Of course, companies must operate within a robust and proportionate governance structure. The updated IA principles, however, coming on top of the IA’s April 2020 guidance on ‘Shareholder Expectations on Executive Remuneration during the COVID-19 pandemic’, increase the load on the majority of remuneration committees who reach that standard. Our research indicates that NEDs are concerned about the increasing burden of regulation and the potential implications for the quality (and diversity) of Boards if talented individuals are deterred from wanting to become NEDs.

To discuss this article, please contact: Nigel Mills, Paul Norris, Stuart James or JD Ghosh.

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