UK Investment Association is ok with no “LTI”, but wants still more disclosure
07/11/2016
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Guerdon Associates have previously noted that the Principles of Remuneration of the UK Investment Association (the “Association”) have provided the genesis for most investor and proxy adviser guidelines, with their influence extending to Australia and other countries. They are, therefore, of considerable importance.

The Association, with members managing more than £5.7 trillion of assets, released an open letter to all FTSE 350 companies on 31 October setting out new shareholder expectations on executive pay.

This letter follows the recommendations of the industry-led Executive Remuneration Working Group that looked to address the issue of complexity surrounding executive pay (see HEREHERE, and HERE).

The letter states that the Association has rewritten its own Principles of Remuneration in line with the Working Group’s recommendations to pave the way for “simpler and more flexible” remuneration structures.

The Principles have been updated to ensure they do not promote a single remuneration structure above others. This is intended to ensure companies choose the appropriate structure for their business and strategy rather than automatically opting for the commonly used Long Term Incentive Plan (LTIP) structure.

The updated Principles also make it clear that company Boards must provide investors with clear justification for their Executives’ level of pay. Boards need to justify both the maximum potential remuneration as set out in the Remuneration Policy, and also the payments actually made during the year in the context of the company’s performance.

Interestingly, both of these are required, in any event, by UK compliance requirements. However, only the latter are being disclosed by US companies (a compliance requirement) and larger Australian companies (on a voluntary basis). The maximum potential remuneration has not been disclosed as a matter of course by US and Australian companies, making proxy advisers and institutional investors do the work (almost invariably on an incorrect basis).

The Association, whose members manage around a third of UK companies on behalf of their clients, is calling upon companies to take action on the levels of pay in accord with a populist backlash.

The Association is also asking boards to disclose pay ratios between the CEO and median employee, and the CEO and the Executive team, to provide investors with the context they need to understand the scale of the awards being given. This request may well be in anticipation of the new parliamentary inquiry (see HERE).

Alongside the updated Principles, the Association has also informed companies of the need to improve shareholder consultation on remuneration issues. The Association maintains this engagement should be based on how the executive pay framework is in line with the company’s strategy.

The granddaddy of proxy adviser remuneration voting recommenders is the Association’s corporate governance research unit, IVIS. This unit analyses companies across the FTSE All Share Index and will be monitoring them against these new principles. It is proposing to highlight areas of concern to investors ahead of voting at company meetings.

The guidelines, like all guidelines we have seen on remuneration issues:

  • make assertions of fact not founded on evidence;
  • make moral judgements that are not differentiated from, and often difficult to discern and disentangle from, directors’ duty of care and legal obligations; and
  • specify requirements that, if you took the trouble to unearth their origins, are no more than beliefs of what is “good” for investors and other stakeholders that have not been tested by critical thinking.

These updated Principles should be welcome news for boards that have valiantly tried over the years to shoehorn a remuneration framework that suits their business into incompatible and inflexible governance guidelines.

But boards should not set hopes too high. The revised Principles reflect the continuing evolution of investor guidance. In deference to the diverse views of its members, it appears that the Association is having a bet each way, especially in regards to remuneration. One does not know if, for example, alternatives to traditional LTI frameworks are being encouraged or discouraged. The outcome is likely to be confusion for some time yet, with resistance to change from many institutional investors likely.

The Association’s claim for “more simple” is likely to be lost in the sea of additional disclosure they require. The claim for “more flexible” depends on the extent that institutional investors are willing to depart from models that the new Principles still support to models that the new Principles permit, but a significant proportion of institutional investors and their proxy advisers have not the resources, and hence capability, to properly consider frameworks now permitted by the new Principles.

See the new Principles HERE.

See the Association’s letter HERE.

© Guerdon Associates 2020
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