The Investment Association, which represents 250 UK investment managers who together manage over £8.5 trillion for clients in the UK and around the world, has updated its influential ‘Principles of Remuneration’. The Principles set out investment managers' expectations for executive remuneration policies and practices and are, this year, supplemented by updated guidance on the impact of COVID-19 on executive remuneration. The main theme is that the pandemic has made executive reward decisions much more complicated for companies and how it is essential to understand the views of institutional shareholders in what is an increasingly regulated area where shareholder activism continues and adverse press coverage can be damaging to both brand and reputation. The IA's key message is ensuring that executives and the general workforce are treated consistently. So to understand how that can be achieved I spoke to share plans specialist James Sullivan-Tailyour who joined me by video-link. I started by asking James why this matters:
James Sullivan-Tailyour: “Well, the Investment Association is one of the most influential investor bodies and their guidance on remuneration really sets the benchmark for all of the standards relating to executive pay, certainly in the UK, so whenever they publish new guidance it is always a big event but particularly this year it's really important because COVID has impacted so many things, least of all executive remuneration. Whilst the guidance hasn't really been amended, in a great deal, the accompanying letter to remuneration committee chairmen has really emphasised the importance of executive pay reflecting the wider experience of the company's workforce in this year when so much has been upturned by COVID and what the Investment Association are really looking for is a clear link between the experience of the workforce and what's happening to executive pay. So if, for example, employees have been furloughed or made redundant or the company has suspended its dividend or been relying on some form of direct or indirect government support, the Investment Association is expecting that that is reflected in remuneration outcomes for directors and senior managers. That includes suspending or limiting annual bonuses. The Investment Association is pretty clear that it doesn't think it's appropriate for annual bonuses to be paid where the dividend has been suspended, or where there have been significant numbers of staff who been placed on furlough, and it also might involve the remuneration committee exercising its overriding discretion to reduce the vesting outcome of long term incentive awards to the extent that they might otherwise vest, and that's all to reflect the broader experience of the company and in particular the workforce - that's the overriding theme this year. There are a few other nuances and changes that have been picked out in the guidance. In particular, the new section that's worth noting is there's a shift in emphasis. The Investment Association is becoming more comfortable with ESG, so environmental, social and governance, targets that might be applicable to annual bonus awards and long term incentive awards, but their support for those measures is nuanced and they certainly are not recommending that the majority of any annual bonus or long term incentive award is waited on those ESG targets. So there's cautious support but companies still need to bear in mind that any new ESG targets need to be clearly linked to the company's strategy in the same way as any other annual any other targets applicable to annual bonuses and long term incentive awards are, and there needs to be a clear rationale for doing so. A few other changes: more emphasis has been placed on the ability of companies to be able to enforce their post cessation shareholding guidelines that apply to executives. So the Investment Association is aware of the fact that some companies are grappling with how to properly enforce those and the Investment Association is effectively doubling down on that requirement. The Investment Association has also identified that companies continue to make progress in reducing executive directors' pension contributions, and they will be issuing 'vote against' recommendations or 'red tops' as they call it, to the extent that new directors and executive pension contributions are not aligned with workforce and they also expect to see a credible action plan for reducing the pension contribution levels of incumbent directors.”
Andrew Ninian is the Director, Stewardship and Corporate Governance at the Investment Association and, as James said, last week he wrote to Remuneration Committee Chairs outlining the key changes to the Principles of Remuneration for 2021 and highlighting the key areas of focus for IA members for the forthcoming AGM season. In that letter he also mentions pensions. He says pension contributions for executive directors, new and incumbent, should be aligned with those available to the majority of the workforce. If you’d like to read more about that we have put a link to that letter in the transcript of this programme for you.