The IA wrote to FTSE 350 Remuneration Committee Chairs yesterday to summarise the outcome of its annual review of its Principles of Remuneration.  This year the review has taken place against a backdrop of the ongoing pandemic and, at the same time as updating its Principles, the IA has also issued updated guidance on shareholder expectations during the COVID-19 pandemic. 

1. The updated guidance on how to account for the impact of COVID-19 in remuneration decisions continues to emphasise the need to balance incentive outcomes for executives with the experience of shareholders, the wider workforce and other stakeholders.  In particular:

• The IA does not expect companies that have participated in the government’s job retention scheme, raised capital or have otherwise relied upon direct external support to pay bonuses for FY2020 or FY2020/21, other than in “truly exceptional circumstances”;
• Remuneration Committees should disclose how the positive financial impact of other indirect government support such as business rate relief has been accounted for in remuneration outcomes;
• If a company has cancelled FY2019 or FY2019/20 dividends, this should be reflected through the operation of malus on deferred share awards or in FY2020 bonus outturns;
•  In-flight bonus and LTIP targets should not be adjusted to take account of the impact of COVID-19. Remuneration Committee Chairs will be expected to confirm in their annual statement that no adjustments have been made.  Where adjustments have been made, these should be fully disclosed and explained in the remuneration report.  In addition, FY2021 variable pay opportunity should not be increased to compensate for lower remuneration in FY2020 due to the pandemic;
• Where a bonus is paid, consideration could be given to increasing the portion deferred in shares;
• Consideration should be given to reducing LTIP or restricted share grant levels to reflect the shareholder experience;
• Targets for future LTIP awards should be appropriately stretching.  Where target ranges are lowered or widened, these should be at least as stretching in the circumstances as previous targets and a full justification should be given with reference to the target-setting process, internal budgets and broker forecasts;
• Remuneration Committees will be expected to exercise discretion to prevent inappropriate outcomes as and when awards vest, particularly where performance is not consistent with the shareholder experience or windfall gains have been created;
• The inability of a company to set meaningful LTIP targets during the pandemic is not by itself a reason to move to a restricted share model.  Proposals to adopt restricted shares will continue to be assessed on their strategic rationale;
• Companies significantly impacted by the reaction to COVID-19 should consider whether it is an appropriate time to make changes to their remuneration policies as it may be more appropriate to wait until there is greater clarity on the future market environment.

In the letter to Committee Chairs, the IA has highlighted changes to the Principles in the following areas:

2. Non-Financial Performance Measures: The IA notes that companies are incorporating ESG into their long term strategy. In these cases the IA states that it is appropriate for Remuneration Committees to consider introducing ESG measures into their variable pay arrangements but emphasises (as with any other performance condition) that ESG metrics should be clearly linked to the implementation of the company’s strategy.

3. In addition, the IA notes an increasing use of strategic or personal targets in bonuses. In response the IA emphasises that;

• financial targets should continue to comprise the significant majority of the overall annual bonus;
• companies should demonstrate how personal objectives link to long-term value creation;

4. Bonus deferral:  In a change that may affect a number of smaller companies, bonus deferral should apply to a proportion of the entire bonus when bonus opportunity is greater than 100% of salary, i.e. not just the proportion in excess of 100% of salary;

5. Post-cessation shareholding policies have been implemented by the majority of companies and the IA will be asking companies to explain how they have ensured their policy is enforceable;

6. Pension:  Companies continue to be expected to set out a credible action plan for alignment of incumbent director pensions with the workforce by the end of 2022.  For companies with a year end on or after 31 December 2020 which have not set out a credible plan, IVIS will Red Top companies which have an incumbent executive director with a pension contribution set at or above 15% of base salary (previously the threshold was 25%);

The letter to Remuneration Committee Chairs can be found here, the updated principles of remuneration can be found here, and the updated guidance on COVID-19 can be found here.

Other recent developments: PIRC, Autonomy/the High Pay Centre and ISS

In September PIRC consulted on its’ “proposed new pay policy”.  The proposed new pay policy has the following five principles:

1. A “going rate true market salary”
2. Director service contracts approved by shareholder vote
3. A single profit pool to be distributed company wide
4. Bonuses to be paid only in exceptional circumstances and subject to a shareholder vote
5. No LTIPs

In addition, PIRC state that director shareholdings should be purchased from “total pay, or other own resources”.  The report consultation document can be found here.

In October Autonomy, a left-leaning think tank, together with the High Pay Centre issued a publication arguing that excessive salaries should be capped to save industries and redistribute wealth.  The publication has a number of recommendations which include redistributing the earnings of the top 1% of earners in order to boost the wages of low earners, and capping wages at £100k.  It states that 69% of the public support capping wages at one of £100k, £200k or £300k.  The report, which is high on aspiration and short on practical suggestions for implementation, can be found here.

In November, ISS updated their proxy voting guidelines for EMEA with only minor changes for U.K. company remuneration policies, to reflect the widespread implementation of the 2018 UK Corporate Governance Code requirements on alignment of pensions with the wider workforce and post-employment share ownership requirements.  

More generally, ISS have updated their voting guidance on overboarding to allow a less formulaic assessment of overboarding where Directors are on the boards of “less complex companies”; and a toughening of their guidance on female representation on UK boards and will now recommend votes against Nomination Committee Chairs and (where relevant) other directors of FTSE 350 companies that do not meet the recommendations of the Hampton-Alexander Review and of FTSE Small Cap or larger AIM companies that do not have at least one female board member. 

If you would like to discuss any of these developments further or have other enquiries please contact one of our Managing Directors, whose details are shown on the right hand side of this article.