The IA Principles of Remuneration and Glass Lewis' 2020 Guidelines

The Investment Association and Glass Lewis have today both published their updated guidance ahead of the 2020 AGM season.

For The IA, the revised Principles of Remuneration build upon the guidance which was set out in September 2019 (which was covered in our previous briefing (www.fit-rem.com) which focused on their approach in relation to pension provision.

In the covering letter which accompanies the revised guidelines, The Investment Association has highlighted the following areas of focus.

Alternative remuneration structures

Its members are increasingly of the view that traditional LTIP structures (performance shares) are not working as effectively as they could for all companies and encourages all Remuneration Committees to evaluate whether the current approach is appropriately aligned with the company’s strategy. There is a reference to the recent research from the Purposeful Company (which covered the broader use of different types of restricted share arrangements) and notes that, on the back of this report, The IA's members commit to working with companies to consider the circumstances in which these may be used more widely in the UK market.

Discretion on vesting

This section has been updated to include the “suggestion” that Remuneration Committees build into their incentive plans a mechanism which would allow them to limit the outcomes above a specific monetary value. Companies would be expected to determine the limit and how best it should be implemented.

Approach on pension

The IA has reiterated their previous guidance in September 2019 that pension contributions for executive directors should be aligned with those of the majority of the workforce and that members expect there to be a credible plan to reduce contributions of incumbent directors to that level by the end of 2022. Members expect that companies will disclose the pension rate considered to apply to the majority of the workforce and explain how this was derived.

Post-employment shareholding requirement

There is an expectation that all new policy approvals will contain a post-employment shareholding requirement (with the Principles making clear this should be for at least two years post-cessation and should apply to a level equal to the lower of the shareholding requirement or the actual shareholding on departure).

Levels of Remuneration

A continued scrutiny from members on any increases in pay levels, whether fixed or variable. 

Pay for Performance

Members expect there to be robust explanations for why remuneration pay-outs are appropriate. This rationale is expected to be clear across both financial and non-financial measures. Strategic and personal targets and outcomes should be disclosed separately.

Other notable changes in the actual Principles are:

• Discretion – the guidelines now specifically call out negative impacts on the company’s workforce or customers as events which should be considered when determining whether incentive outcomes are appropriate
• Leaver provisions – a new section which notes that any payments in lieu of notice should be limited to contractual entitlements and that the notice period should commence immediately from a decision being made. Annual bonus payments should be only be paid to good leavers and deferred bonuses should continue to their normal vesting date. Companies should disclose why a Director is treated as a good leaver.
• Consultation – encourages Remuneration Committees to send a wrap up letter to shareholders following consultation to set out the final approach

Glass Lewis has also today updated its UK proxy voting guidelines. The main summary of the changes in relation to remuneration are:

• Salaries and pensions – expectation that salary increases, and pension contribution levels reflect those awarded to the wider workforce (they also refer to the majority of the workforce when referencing pension alignment). They recognise that incumbents’ rates may need to be reduced over time.
• Incentive plan limits – clear and transparent limits should be included, expressed as a % of salary
• Post-exit shareholding requirements – a best practice feature generally expected to be included in remuneration policies (but without being as prescriptive on detail as The IA)
• Threshold vesting under LTIPs – should be no more than 25% of maximum vesting
• Discretion – expectation that remuneration committees consider exercising downward discretion where a company has suffered an exceptional negative event, even if formulaic targets have been met. They note that “investors may expect a remuneration committee to reduce an annual bonus pay-out and/or the size of an LTI grant following a significant decline in share price”
• Remuneration in Financial Services – expect financial institutions to provide a more robust justification for any deviations for key best practice recommendations

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 email is confidential. If you are not the intended recipient, please delete the email and do not use it in any way. FIT Remuneration Consultants LLP (FIT) does not accept or assume responsibility for any use of or reliance on this email by anyone, other than the intended addressee to the extent agreed in the relevant contract for the matter to which this email relates (if any). Consistent with data protection regulations, if you would like to review our records relating to your contact details or to request their removal from our systems, please contact us at info@fit-rem.com. While all reasonable care has been taken to avoid the transmission of viruses, it is the responsibility of the recipient to ensure that the onward transmission, opening or use of this message and any attachments will not adversely affect its systems or data. No responsibility is accepted by FIT in this regard. FIT is a limited liability partnership registered in England under registered number OC364396, with its registered address at 5 Fitzhardinge St, London W1H 6ED.