UK executive remuneration is changing. The change began after layer upon layer of prescriptive governance standards was fundamentally failing to do their job, creating more risk. The better executives and even whole companies were decamping to other countries where pay was higher, and varied with the value they added. It is safe to say it reached its nadir when the UK’s Capital Markets Industry Taskforce reported that the UK had lost its mojo as it buckled under the weight of inflexible governance standards (see HERE).

The wakeup call and stakeholders’ response to it has seen an increasing number of UK companies break out and apply different executive pay frameworks and levels for competitive advantage.

The UK Investment Association (IA) is a key to UK executive pay standards. It delayed its regular ‘Principles’ update for 6 months as it struggled to simplify, and shrug off prescriptive governance guidelines contributing to the drab, grey, one size fits all pay frameworks required of all UK listed companies, irrespective of business cycle, competition, markets and ambition (For example, see our summary of their last update HERE.)

Their new guidelines arrived last month.

They better accommodate variations among UK listed companies to have varying pay levels and pay structure. There is more scope for their executive directors’ pay to be:

• At a level that enables them to retain their leaders against the lure of higher paying (i.e. US and private equity) markets
• Apply design features such as a blend of traditional performance-based LTIs and restricted stock, not defer annual incentives (particularly where executives have significant shareholdings) and permit greater acceptance of use of discretion being symmetrical (rather than negative only).

The IA’s Principles have been largely simplified and the tone is less prescriptive throughout.

There are now 3 overarching principles, in which remuneration policies are to:

• Promote long-term value creation through delivery of the board’s corporate strategy
• Support individual and corporate performance, support sustainable long-term financial health and promote risk management, and
• Deliver remuneration levels clearly linked to performance

The last policy is an addition to the existing framework, where the IA asserts that the best way to meet those objectives is collaborating with shareholders, stressing that there is no one-size-fits-all approach and that they are guidelines, not rules.

The requirements for dilution have also been relaxed, with removal of the 5% dilution limit for discretionary schemes in any rolling 10-year period.

While Australian guidelines have not been as prescriptive as the IA’s Principles, the 2 strikes law has had arguably more effective impact on compliance to a one size fits all framework. As a result many ASX listed companies have also felt the weight of various stakeholder guidance to be excessive.  Therefore, some may say there is also room to or external stakeholders to lighten up, simplify and permit more flexibility.

See HERE for the latest IA Remuneration Principles.

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