UK investor guidelines differ markedly from Australia’s

The UK-based Investment Association developed the forerunner of remuneration governance guidelines adopted and adapted by most governance agencies around the world, including in Australia.

It has released its most recent executive remuneration guidelines, accompanied by a letter to remuneration committee chairs explaining key points of focus for the upcoming AGM season.

It is remarkable that these guidelines, and the latest from their closest US equivalent (see HERE), appear to converge.

Both reflect outcomes from a global research study we published recently (see HERE).

Yet there remain significant variations from current Australian proxy adviser and investor guidelines.

For ASX listed companies with UK institutional investors, and those trying to anticipate where local governance standards may move to next, the following summary of the IA changes may be useful.

Alternative LTI frameworks

The focus on alternative LTI frameworks has continued this year. The IA stated that its members are increasingly of the view that LTIs are not optimal in many situations due to increasing grant levels or volatile and significant vesting outcomes. It referenced research from the Purposeful Company (see HERE) which found that the number of investors willing to consider alternative remuneration structures is growing.

That has not been the case in Australia in 2019, which has seen fewer companies consider and put forward non-standard remuneration frameworks given the coolness such ideas receive from proxy advisers and investors.

Board discretion

The IA would like companies to ensure incentive schemes enable discretion that limits vesting outcomes when a specific monetary value is exceeded, citing reputational damage arising from significant payments.

This is an interesting emphasis arising from vocal concerns regarding inequality that appear to focus on reducing the upside rather than lifting the amount received at the bottom from wealth generation.

Shareholding requirements

The IA expects post-employment shareholding requirements in all new policy approvals.

To an extent, this is also receiving attention in North America.

This has failed to receive any traction in Australia, probably due to concerns in regard to high taxes on unvested equity at termination and risks associated with significant undiversified holdings of personal wealth.

Levels of remuneration

The IA will be heavily scrutinising incremental increases to fixed pay, considering the effect of such increases on aggregate remuneration.

Pay for performance

Transparency is key on remuneration outcomes.

This reinforces the tenor of the UK remuneration reports, which requires disclosure of realisable pay rather than provide the investor with maximum pay potential granted in the year, and what has to be achieved to realise it.

The IA’s letter can be found HERE .

The new Remuneration Principles can be found HERE.

© Guerdon Associates 2024
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