Executive briefing – November 2022

New Investor Guidelines

The Investment Association updated their guidelines today while individual institutional investment firms (including LGIM) have updated their guidelines in the last couple of weeks. We also understand that ISS is likely to update their guidelines later this month.

Investment Association Guidelines

There are very few substantive changes to the guidelines this year and, as has become more common in recent years, the more interesting elements are actually in their cover letter.

The key points to note are:

• NED fees: Explicit recognition that NED fees have not increased materially for some time while the time commitment and broader expectation of NEDs has increased leading investors to recognise that above inflationary increases may be warranted
• Windfall gains from 2020 LTIP grants: while the IA generally encourages companies to reduce the grant level of awards where there has been a material fall in share price, in 2020, more companies retained the normal grant multiple (expressed as the value of shares granted) when share prices fell in the midst of Covid and, instead, committed in their annual reports to consider on vesting whether the size of the grant had led to a windfall gain which should be moderated at that stage. As companies will need to consider such issues in 2023, the update seeks to provide a clear reminder of the commitment which many companies made and state that they expect companies to make specific reference to their considering whether to exercise discretion i.e. justification should be provided even where discretion is not exercised
• Executive Director salary increases: while many companies have tended to align Executive Director salary increases with those awarded to the wider workforce and this has generally received shareholder support, given the current levels of ‘cost of living’ inflation and (in the view of the Investment Association) its disproportionate impact on the lower paid, they encourage companies to consider awarding lower increases to Executive Directors
• ESG: interestingly, the Investment Association notes that its members have differing views on the degree to which ESG based measures should be included within variable pay arrangements (from increasing weighting in all cases to only where strategically significant) and increasingly call for greater signposting of the journey companies are on together with, where ESG measures are used, being clearly and objectively measurable
• Pensions: the Investment Association has been encouraging companies to align contribution levels by January 2023 for some time now and will now automatically ‘red top’ any non-compliance
• Use of discretion: there are some wording updates to the guidelines encouraging use of discretion (to reduce variable pay outcomes). The previous wording focused on making adjustments to align with the shareholder experience whereas the updates both refer to wider stakeholders and to the specific contribution to success of the individual executives which implies greater use of negative discretion where, for example, companies are considering redundancies or receiving adverse publicity from special interest groups.

On the plus side, there is no ‘new news’ and companies preparing to renew their policies at their 2023 AGM should already be considering all the key issues without being thrown any curveballs in these guidelines.

On the negative side, the tone continues to be asymmetric pointing out, as (at least in our experience) Remuneration Committees are already fully aware, the need to be cognisant of the wider situation, the impact of the cost of living crisis on lower paid colleagues and the increasing impact of recession in light of the Ukrainian situation, without noting that UK-based executives are increasingly uncompetitively paid when compared with global peers. Certainly, in our experience, our US-based and PE-backed clients are much more inclined to exercise positive discretion regarding bonus out-turns where targets set before the Russian invasion of Ukraine have been knocked off course through those events.

LGIM guidelines

A couple of weeks ago, LGIM issued its own guidelines which are generally reflected above. It is also worth noting:

• ESG: while previously more reluctant to support ESG measures in variable pay plans, they have now become much more supportive and, indeed, have set out a number of sectors where they expect at least 20% of any LTIP award to linked to such measures.  They have produced suggestions on measures to consider for those sectors and much prefer defined emissions measures.  Indeed, they positively dislike employee engagement as a measure. In any event, they expect measures to be clearly disclosed and both objectively measurable and subject to third party verification 
• Restricted shares: they suggest that awards should be subject to a pre-disclosed objective financial underpin. Given that the rationale behind such awards is to swap quantum (awards typically being made over shares worth half the amount a more traditional LTIP award would have been) in return for greater certainty, it is, in our view, critical that any underpin is there simply to protect against manifest under-performance rather than being a ‘soft’ performance condition, particularly given current recessionary fears. From 2025, they also expect those companies having the greatest impact on climate change to also have a related gateway
• Cost of living increases: trailing the Investment Association’s position above, they encourage caution in simply adopting for Executive Directors the level of salary increase awarded to the wider workforce
• Windfall gains: similarly, they set out their intention to vote against remuneration reports where they do not consider Remuneration Committees to have been sufficiently thorough in considering whether to exercise discretion to reduce vesting levels and/ or in failing to adequately explain its process and decision making.  

If you wish to discuss anything arising from this briefing, please ask your usual contact at FIT or call us on 020 7034 1111 or email us at Info@fit-rem.com. 

This paper is intended to be a summary of key issues but is not comprehensive and does not constitute advice. No legal responsibility is accepted as a result of reliance on the contents of this paper.

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