The Investment Association has created a new set of simplified guidelines for executive remuneration policies, reacting to the “evolving practices in the market” and investor expectations.
The remuneration guidelines were formed under three principles, which included promoting long-term value creation, supporting individual and corporate performance, and delivering remuneration “clearly linked” to company performance.
Andrew Ninian, director of stewardship, risk and tax at the Investment Association, said: “We have simplified our Principles of Remuneration to demonstrate that investors want to incentivise delivery of long-term performance. Our Principles set out the main areas that investors are interested in, stress that each company should adopt a structure that makes sense for its business and the market it operates in, and that we expect early engagement on any potentially novel changes.
“Investors want to see companies succeed and deliver long-term returns to their shareholders, with the structure of executive pay playing an important role in driving and rewarding these results.”
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The IA encouraged companies to undergo a shareholder consultation period before making material changes to remuneration policies to gain a greater understanding of shareholder expectations, as well as sending a ‘wrap up letter’ following any decisions to ensure investors stay informed.
“Shareholder consultations are an opportunity to engage in open and transparent dialogue, ensuring that all perspectives are considered and valued,” the guidelines stated.
“We recognise that this inclusive approach needs to be reciprocated by shareholders to create a constructive exchange of ideas. To facilitate a constructive dialogue, committees should seek early engagement to provide shareholders with sufficient time to consider the proposals and offer meaningful feedback.”
Companies were also prompted to detail how pay structures work across the firm, including the ratio of pay between the CEO and average employee, and how any changes to policy affected employee retention. The IA warned against only using benchmarking as an indicator for remuneration, as it can create a “ratchet effect in the market”.
The guidelines detailed expectations for basic salaries, which the IA notes should be in line with the “relevant wider workforce in their locality”, pensions and benefits. It also recommended that bonuses payouts be explained to shareholders, and that if bonuses are not based on quantifiable metrics, that there is rationale on how success is measured.
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“Shareholders want bonus payments to be consistent with the financial and non-financial performance of the company. Shareholders expect that good performance against non-financial/strategic metrics would normally translate into financial performance of the company,” the report stated.
“Therefore, in circumstances where bonus is payable for non-financial performance only, shareholders would like to understand the committee’s rationale in support of such payments, including details on how the achievement of the non-financial metrics were evidenced and how pay outcomes are justified.”
In order to align the goals of shareholders and executives, the report stated that shareholders look for executives to have a minimum share holding requirement for each executive, with consequences if this is not upheld. They also advocated for the UK Corporate Governance Code requirement which ensures executives continue to have responsibility for their decisions at the company by holding shares for two years after their departure.
