Investment Association (IA) updated “Principles of Remuneration”
On 22 November 2018 the Investment Association (IA) published updated executive pay guidelines in light of investor concerns that companies are not listening or responding to shareholders over pay. These “Principles of Remuneration” set out investor expectations and best practice for how companies should pay their top executives in line with the new Corporate Governance Code.
Under the new Principles, investors will expect companies to:
Pensions
Pay pension contributions to Directors in line with the rate given to the majority of the rest of the workforce, rather than giving higher payments as a mechanism for increasing total remuneration. New executive directors and directors changing roles should be appointed on this pension contribution level. Pension contributions for current executive directors should be reduced over time to equal the rate received by the majority of the workforce with no compensation for this change.
Malus, Clawback & Discretion
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’, in order to make them a more effective tool to recover bonuses. Companies should also set out the process for implementing malus and clawback, not simply the triggers, and ensure the remuneration committee has sufficient power to exercise discretion.
Where the business has suffered an exceptional negative event, the payment of variable remuneration, is discouraged (even if targets have been met). Shareholders should be consulted, and any proposed payments carefully explained. Again, the remuneration committee should ensure it has sufficient the power to exercise discretion.
Share-holding
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. The level should be equal to the lower of the shareholding requirement immediately prior to departure or the actual shareholding on departure. The enforcement mechanism should be set out (e.g. employee ownership trusts or nominee accounts).
The requirement should apply to all new executive directors and at the earliest opportunity and at a minimum by the company's next policy vote for existing executive directors.
Pay ratio reporting
Adopt new pay ratio reporting requirements early, to maximise transparency over pay and ensure that there is accountability for high levels of pay internally.
Restricted shares
Introduction of restricted shares to be assessed on a case by case basis and depend on the strategic rationale for restricted shares (e.g. sector-wide factors, like the impact of commodity pricing or a cyclical business model, could make a restricted share schemes appropriate, turnaround situations could also be appropriate context). Other factors taken into account will include possible use of discretion, the presence of a holding period which should be at least five years, the provision of post leaving shareholding guidelines which are material and in place for at least 2 years, the proposed discount to current opportunity levels and past remuneration practice.
In an open letter to the Chairs of Remuneration Committees of FTSE 350 companies, the IA expressed the growing frustration that many companies were not listening to investor views. This often means that investors have been forced to vote against companies’ remuneration resolutions, which has led to a growing number of shareholder rebellions over the 2018 AGM season.
This year’s review of the Principles took place against a backdrop of new remuneration provisions in a revised UK Corporate Governance Code, and follows a 2018 AGM season that saw increasing dissent on remuneration resolutions in the FTSE 100. This year, as of October 31st, 61 companies were added to the IA Public Register of shareholder revolts for pay-related resolutions - up 9 on the same period last year. Of the 61, 15 are FTSE 100 companies, 23 are FTSE 250 companies and 23 are FTSE Small cap companies.
