The Investment Association signals increased flexibility on UK executive remuneration

On 23 February 2024, the Investment Association (the IA) issued a letter to the FTSE 350 Remuneration Committee Chairs.

The letter looks back at the 2023 AGM season, considers priorities for 2024 and addresses the absence of the IA’s annual update of its Remuneration Principles in 2023 (usually published in November) explaining that a more fundamental review of the Principles is underway.

It is expected that a revised version of the Principles will be published later in 2024. The current Principles will continue to apply until then. 

Review of 2023 and priorities for 2024

The IA notes a consensus among its members that Remuneration Committees have generally responded well to investor expectations during 2023, particularly where restraints on executive salary increases and windfall gains are concerned.

To some extent this is unsurprising, given that, in its letter to Remuneration Committee Chairs in 2022, the IA asked companies to take a balanced approach to executive pay and consider the disproportionate effect that inflation and the cost of living crisis have on lower paid employees. 

The IA has confirmed that its priorities for 2024 will be continued restraint on executive salary increases and for Remuneration Committees to clearly demonstrate alignment between pay and performance. 

Unlocking UK competitiveness 

The IA’s in-depth review of its Remuneration Principles this year is prompted by feedback received from FTSE 350 remuneration committees and companies during roundtable meetings with the IA last autumn. A key theme in those meetings was the desire to improve the competitiveness of UK remuneration. 

While it was not possible to reach consensus on a single solution to unlock the UK’s competitiveness, the IA notes three key themes highlighted by companies as needing to be addressed to make the UK a more attractive place to list and remain listed. These are as follows. 

• Grant levels – additional flexibility to grant larger awards to enable global companies to attract the right calibre of executive talent, in particular from the US. 
• Hybrid schemes – the ability to offer a mix of performance- and time-based awards which, again, would help UK listed companies attract talent from the US and other jurisdictions (where such schemes are more common).
• Perceived value – current requirements that are intended to ensure long-term alignment between executives and shareholders (e.g. post-vesting holding periods, shareholding guidelines, post-employment shareholding requirements and malus and clawback) have a combined effect of reducing the perceived value of executive remuneration in the UK. 

New Remuneration Principles

On the back of the feedback received, the IA is now in the process of revising its Remuneration Principles.

While the IA notes that the new Principles will be simplified and should be considered as guidance, rather than hard rules, it will be interesting to see to what extent that the IA relaxes the prescriptive nature of the current Principles and opens the door for a wider variety of schemes and arrangements. 

A shorter and simpler set of Remuneration Principles will undoubtedly be welcomed by many companies. However, the IA’s genuine support for more flexible and competitive remuneration arrangements will truly be tested when it issues its voting recommendations (via IVIS) under such new guidelines.