13/12/2021
The UK Investment Association (IA) has members that range from small, independent UK investment firms to global asset managers. Collectively, they manage over £9.4 trillion of assets on behalf of their clients around the world. That is 13% of the £75 trillion global assets under management.
The IA and its predecessors pioneered remuneration report voting guidelines, since adopted in various forms by investors globally, impacting ASX-listed entities, especially those in the ASX 100. So it is important to keep on top of its ever evolving guidelines as a window in the state of mind of those who vote on executive pay matters.
The IA recently updated its Remuneration Principles. These will come into effect for December end companies and apply throughout 2022.
Among the changes, the key updates are:
- The level of remuneration is a concern. There must be a clear link between performance and sustainable long term value creation. There needs to be a “relevant and fairly constructed peer universe” to serve as a reference point for remuneration. This must be clearly communicated to investors. Using the median as a benchmark in a simplistic manner is not acceptable, as the IA feels this can have a ratcheted effect on levels of remuneration and lead to unsustainable increases. Investors will continue to pay close attention to how fixed pay or variable pay increases are justified. In particular, how any potential increases affect total remuneration must be considered in making those increases. GA comment: The IA’s views remain quaint and are probably inapplicable in the Australian context. For example, for most of the past 12 years ASX-listed company median CEO remuneration levels have barely moved and in some years declined. This is a consequence of economic and company performance, internal succession on lower rates of pay, and other factors. In addition, the IA may also assume that low inflation from prior years will continue. This is beginning to look a little doubtful.
- With regard to a particular remuneration structure for long term incentive plans, called the Value Creation Plan, these must be accompanied by: a) a clearly identified and communicated strategic rationale for its use; b) a monetary cap; c) stretch and robustly-set targets; and d) consideration for its potentially dilutive effect. GA comment: VCPs are incentive plans that deliver a set % of TSR above a hurdle to be paid to executives. It is not uncommon in private equity. Given listed entities must compete for talent in the same pool the IA constraints make it difficult.
- Long term incentive grant sizes are expected to be scaled back in the event of a share price fall. Relying on discretion post vesting is no longer considered sufficient. Rather, the remuneration committee is expected to consider the company’s financial and share price performance over the year when reviewing grant sizes. This is particularly for restricted share grants which have been favoured in recent times. The 50% discount applied may not be enough if it follows a fall in the share price. GA comment: Given the frothiness of global stock markets corrections are likely. This would be especially so for growth stocks, as interest rates rise, their PE ratios should reduce. The IA stance would appear simplistic.
- Malus and clawback should be triggered on more than gross misconduct
and misstatement of results. Remuneration committees are expected to define specific circumstances under which malus and clawback will be triggered. These circumstances should be clearly disclosed to shareholders.
GA comment: One likely impact of the IA guideline is more highly structured consequence management frameworks. These reduce the extent that directors need to exercise discretion. At this rate could the IA policy be heading towards artificial intelligence and algorithms replacing judgement?
- The use of discretion should be disclosed. The remuneration committee should also disclose how stakeholder experience has been considered when applying discretion.
ESG also figures in the Principles. Incentive plans must include ESG metrics and the management of these risks. These metrics must be quantifiable and be material to the business strategy.
See HERE for the updated Remuneration Principles.
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