The Investment Association (IA)—the leading trade association for trust and fund managers in the UK—has written to the chairs of remuneration committees in the FTSE 350 to outline changes to its Principles of Remuneration (“the Principles”). The latest guidance emphasises the IA’s attempts to ensure the UK’s top companies address concerns surrounding executive pay, and the letter is primarily focused on updating the Principles to reflect the publication of the Executive Remuneration Working Group’s final report in July 2016. The main changes are as follows:
- The Principles have been slimmed down to a set of high level issues and updated to reflect the recommendations of the Executive Remuneration Working Group;
- Amendments to acknowledge the need for increased flexibility of remuneration structures;
- Updates to ensure that the Principles do not promote a single remuneration structure;
- Updates to ensure that the level of remuneration has appropriate focus and that companies should disclose pay ratios between the CEO and median employee, and the CEO and the Executive team, to provide the context of the remuneration provided;
- Inclusion of a new section on the importance of improving shareholder consultation, ensuring that it is based on the strategic elements of remuneration and leads to consultation rather than affirmation of the company’s position; and
- Post retirement shareholding guidelines have also been encouraged.
While the updates relating to increased flexibility for remuneration structures will likely be received favourably by companies, the IA’s push for the disclosure of a pay ratio may well be met with a level of resistance amongst issuers; such a requirement—included in Dodd Frank—has certainly had its critics in the US. Nevertheless, given the continued media and political focus on the yawning gap between CEO and median pay, its inclusion in the latest update to the Principles is not overly surprising. Furthermore, engagement between issuers and their investors remains firmly in the spotlight, as does the push for long-termism under pay packages, with the IA seemingly intent on improving the level and nature of dialogue between boards and shareholders, as well as advocating shareholding requirements that continue until after an executive’s departure from a board.
In addition to the updates to the Principles, the letter to committee chairs seeks to re-emphasis certain aspects of remuneration practices in advance of the 2017 AGM season; specifically, levels of remuneration; disclosure of bonus targets (both financial and non-financial); potential and exercised discretion; and the disparity between executive pensions and those of the general workforce are all areas that are likely to be closely scrutinised by the IA’s members in the coming months.
In announcing the updated guidance, Andrew Ninian, the IA’s director of corporate governance and engagement, said that “issues surrounding executive pay are a growing concern for investors, politicians and society as a whole”, and “it is vital that companies have the opportunity to choose the right structure for their business and this must be done in close partnership with their shareholders.” In line with Mr. Ninian’s sentiments, it remains clear that remuneration at UK plc will be under the microscope for the foreseeable future.