Last year the UK Investment Association (IA) simplified its Principles of Remuneration to give more flexibility for case-by-case assessment. Reiterating that they are guidelines and not rules, the Principles allow pay structures to be better tailored to suit business strategy if provided with clear explanation.

The IA’s annual letter to Remuneration Committee Chairs highlighted a few areas where investors believe implementation of the updated Principles can be improved.

A summary of these key areas is provided below:

• Company-specific rationales – While proposals are assessed on a case-by-case basis, investors expect clearer, high quality explanations for remuneration decisions instead of boilerplate rationale such as the need to “attract and retain”. Specific information on why changes were made, how they support the business strategy, and how they impact the future success of the company should be given.
• Benchmarking – The Principles state benchmarking on its own is not sufficient to explain an increase in remuneration. Committees should explain which peers and markets are used and why, considering differences in size, complexity, pay schemes and pay for performance. Companies are encouraged to share benchmarking analysis early in consultations with investors to support greater transparency and more constructive dialogue from the outset. Large pay increases just to “catch up” need clear justification. The focus should be on linking pay to performance.
• Hybrid schemes – IA members generally remain cautious about the use of performance based and service based (restricted stock) equity known as hybrid schemes. They generally expect companies looking to implement such schemes to already have a large US footprint or compete for global talent.
• Bonus deferral – The Principles give flexibility for a proportionate approach. When executives have met long-term shareholding requirements, there may be a reduction in bonus deferral. However, investors do not expect full removal of bonus deferral mechanisms, given their importance for applying malus and clawback provisions.
• On-foot awards and discretion – Any adjustments to on-foot awards should only be made in exceptional circumstances, should be clearly justified to provide a link between pay and performance, and subject to consultation and shareholder support.

The IA’s approach to non-executive director remuneration remains unchanged: independent NEDs should receive fees that reflect their time, responsibility and experience, and may be paid partly in shares purchased at market value. However, in line with the UK Corporate Governance Code, performance-related pay is not considered appropriate for independent NEDs.

So far, no prominent Australian governance body has flagged a more flexible approach.

See HERE for the IA’s Principles of Remuneration.

See HERE for the IA’s letter to RemCo chairs.

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