Influential executive pay guidance for investors updated for 2018

Out-Law News | 06 Nov 2017 | 12:18 pm | 3 min. read

The Investment Association (IA) has updated its influential 'Principles of Remuneration' to provide guidance to remuneration committees on executive pay issues ahead of the 2018 AGM season.

The updated guidance (20-page / 797KB PDF) reflects current best practice, as well as the UK government's current focus on corporate governance reform. However, the changes are "mostly incremental" this year, following last year's more substantial amendments.

As in previous years, IA director Andrew Ninian has written an 'open letter' to remuneration committee chairs (3-page / 229KB PDF) to coincide with the publication of the updated principles. The letter, written on behalf of the large institutional investors that make up the IA's membership, addresses the "progress" made by some large companies in addressing levels of executive pay over the previous year, and urges smaller companies to follow suit.

"Members continue to be concerned by incremental increases to variable remuneration maximums in revised remuneration policies which, on aggregate, lead to a substantial increase to overall remuneration," Ninian said in the letter. "In addition, members continue to be concerned by salary increases and even 'automatic ' inflationary salary increases can have a significant impact on overall remuneration."

"It is essential that companies adequately justify to investors the level of remuneration paid to executives, and take into account the wider social context of executive pay, rather than looking at benchmarking alone. In the coming year, investors will be looking closely at how any increases are justified, and will expect remuneration committees to show restraint in relation to overall quantum," he said.

IA members now also expect companies to disclose the ratio of pay between a company's chief executive and the median or average employee, as well as the chief executive and the rest of the executive team, as part of the process of justifying executive pay levels, Ninian said. He urged "all companies" to disclose pay ratios in 2018 on a voluntary basis, ahead of government action to make publishing pay ratios mandatory.

"In keeping with continued political and public scrutiny of quoted company executive directors' remuneration, and as we await government and FCA consultations due later in the year on proposals to take effect from June next year, the IA reiterates previous calls for remuneration committees to deliver pay restraint, and to satisfy, or better satisfy, investor expectations previously published," said share plans and incentives expert Suzannah Crookes of Pinsent Masons, the law firm behind Out-Law.com.

"Amongst other things, the IA also renews and strengthens last year's call for disclosure of CEO to workforce average and executive committee average pay ratios, even though the government's somewhat different proposal for this, once finalised, will first apply to annual reports presented late in the 2019 AGM season. It also makes firmer demands for clear and timely disclosure of incentive threshold, expected and minimum vesting financial targets, and for detailed explanations of incentive vesting where based on alternative or adjusted company performance metrics and any strategic or personal performance conditions," she said.

The 2018 principles also set out a new expectation that annual bonuses above 100% of salary should be deferred into shares, and any bonus targets disclosed within 12 months of the bonus payment. They do not, however, set out any expected deferral or retention periods.

"This brings non-financial sector quoted companies closer to the mandatory deferral requirements applicable to senior managers and risk takers in banks and investment firms," Pinsent Masons executive remuneration expert Graeme Standen said.

The government announced in August that listed companies would be required to publish and justify the pay ratio between their chief executive and average UK worker, as part of a package of reforms to UK corporate governance. The requirement is to be taken forward by way of secondary legislation and in planned reforms to the UK Corporate Governance Code, and expected to apply to the majority of premium-listed companies on a 'comply or explain' basis in 2019.

Other planned reforms include a new requirement for companies to ensure that their employees' interests are better represented at board level. They may do so by assigning a non-executive director to represent employees, creating an employee advisory council or nominating a director from the workforce. The government has also proposed measures to improve corporate governance at large privately-held businesses, through a set of voluntary principles to be developed by the Financial Reporting Council (FRC).

The government has also announced the introduction of what it described as the world's first public register of listed companies that have suffered at least a 20% 'no' vote on the approval of any shareholder resolution, or have withdrawn any resolution before a general meeting in response to expected shareholder opposition. This register will be overseen by the IA, and the government and the IA have said it will be available in time for the 2018 AGM season. The IA makes no reference to the register or its implementation plans in either the letter or the updated principles, but it announced last month that it was writing about the register to FTSE companies that currently qualify to be included as a result of recent general meetings.

Editor's note 08/11/17: updates on the IA's activity in relation to the public register were added to this story.