UK Investment Association Update to Principles of Remuneration

The UK Investment Association (IA) has members that range from small, independent UK investment firms to global asset managers. Collectively, they manage over £8.8 trillion of assets on behalf of their clients around the world. That is 9% of the £98.3 trillion global assets under management.

The IA and its predecessor organisation pioneered remuneration report voting guidelines, since adopted in various forms by investors and proxy advisors globally, impacting ASX-listed entities, especially those in the ASX 300. Therefore, it is useful to keep on top of its evolving guidelines as a window in the state of mind of those who vote on executive pay matters, especially UK institutional investors.

The IA recently communicated an update to its Principles of Remuneration through a letter addressed to the Chairs of Remuneration Committees of FTSE 350 companies. Throughout the letter, there was heavy emphasis that their annual Principle of Remuneration is purely a guideline and not to be taken as rule. The attention should be on flexibility and innovation in gearing incentive plans specific to the business and strategy of the company.

The theme of this year’s letter: How to ensure the UK remains a competitive location for listing and business while considering various pressures including governmental expectations, international investor diversity, and broader societal concerns. This echoes concerns raised last year by Julia Hoggett, CEO of the London Stock Exchange, (see HERE) and in discussions within the Capital Markets Industry Taskforce (see HERE). Evidence that the IA are listening and endorsing the voice of the business community.

Among the changes, the key updates are:

  • Reflecting on 2023 AGMs, it highlights that companies effectively responded to investor expectations regarding the cost-of-living crisis and windfall gains, leading to reduced dissent on pay resolutions by 18% compared to 2022.
  • The IA is conducting a fundamental review of the IA Principles of Remuneration with pending updates to be published later in 2024. This review is motivated by company feedback and investor expectations that there is a need for simplifying the guidance underpinning the Principles to avoid prescription and duplication. It will focus on ensuring competitiveness, aligning with shareholder interests, and effectively incorporating views on compensation quantum and schemes.
  • The IA acknowledges a significant debate on ensuring competitiveness in the UK listing environment with a focus on the need for clear alignment between pay and performance. This link is critical in gaining shareholder trust and approval for remuneration plans offer higher pay to attract or retain executives. Regarding this concern, three main themes were identified by the IA:
    • Increasing LTIP Grant Levels – To attract top talent, UK companies want more flexibility to increase Long-Term Incentive Plan (LTIP) awards. This adjustment aims to ensure competitive remuneration structures, particularly for those with significant US operations or revenue. GA Comment: Australia is facing similar challenges in attracting executive talent. The UK’s approach to increasing LTIP awards may serve as an example for ASX-listed companies with executives in North America. However, be discerning. Proxy advisors and many larger Australian investors are wary of signs of “contagion”, and do not want to see US style remuneration infecting industries or companies with little exposure to US talent threats.
    • Use of restricted share and regular LTI Schemes – There is a push towards compensation schemes that blend performance-based and restricted shares. This model, already utilised by global firms in the US and elsewhere, is seen as a way to offer competitive packages to executives. GA Comment: In this way, more versatile packages can be offered to balance between performance incentives and long-term investment in company growth. While not for all industries, specific companies may well consider restricted share grants for long term alignment and skin in the game as part of fixed pay, and in lieu of or to replace performance contingent plans made ineffective for various reasons.
    • Impact of UK Corporate Governance Code – The UK Corporate Governance Code’s requirements, such as extended holding periods, shareholding guidelines and malus and clawback, are designed to align executive and shareholder interests over the long term. However, some companies believe these collectively reduce the attractiveness of the compensation packages offered. GA Comment: This highlights a caution for ASX-listed firms to consider governance standards when offering competitive compensation packages. Hyperbolic discounting denotes that extending holding periods and longer vesting periods will reduce the perceived value of the LTI for the executive. These aspects are contextual, so consider what is right for the company.
  • With regard to 2024 AGM focus for investors, in terms of remuneration practices, the emphasis will be on:
    • Adapting to the inflationary environment
    • Demonstrating appropriate remuneration outcomes relative to performance
    • Setting clear targets for 2024 with optimism for productive and constructive discussions

See HERE for the letter addressed to the Chairs of Remuneration Committees of the FTSE 350 companies.

See HERE for the latest Remuneration Principles.

© Guerdon Associates 2024
read more Back to all articles