Investors encourage clearer link between pay and performance

Investors have encouraged all listed companies to have simpler executive pay policies that clearly link pay to a company’s long term success, in the Investment Association's (IA) updated annual guidelines for companies.

Whilst many listed companies are responding to investors’ concerns on pay levels and structures, the IA has reminded all companies that their remuneration policies should meet investor expectations. The announcement comes ahead of the upcoming 2020 AGM season, when the majority of listed companies will bring new remuneration policies to a shareholder vote for the first time since 2017.

The IA has written to Chairs of Remuneration Committees of FTSE 350 companies, stating its Principles of Remuneration which set out investors’ expectations every year on how companies should structure the pay of their top executives. Whilst recognising progress has been made in the last few years, this year investors are asking companies to focus on a number of areas including:

• Simplifying pay structures as long-term incentive plans are recognised as not working effectively for all companies. Shareholders want companies to proactively consider whether alternative performance incentives may better align pay with a company’s strategy. The IA will work with companies as they consider these alternative structures to see if they can be more widely adopted in the UK market. Companies are also being encouraged to look at allowing Remuneration Committees to limit pay-outs from incentive schemes where they consider a pay-out to be excessive.
• Justifying the level of executives’ remuneration and explaining performance-related pay-outs, with robust transparency on targets. Investors are asking companies to show restraint in growing the overall size of pay packets, and are calling for executive pension contributions to be brought in line with the majority of the workforce as soon as possible.
• Strengthening policies for departing directors to ensure the long-term value of the company is prioritised. Directors should now hold a proportion of their shares for at least two years once they’ve left the company.
• Broadening malus and clawback provision triggers and establishing procedures for their use, which can be used to forfeit or recover executive bonuses, to include payments based on erroneous or misleading data, misconduct, misstatement of accounts, serious reputational damage and corporate failure.

Andrew Ninian, Director of Stewardship and Corporate Governance at the Investment Association, said:

"The 2020 AGM season will be a key year for many companies, with investors looking out for greater alignment on pay with long-term company strategy. Some companies have listened to investors over the last few years and made changes to their remuneration structures to take account of investors’ views.

"However with the majority of remuneration policies up for renewal next year, investors will be looking for signs that companies continue to listen to key concerns and ensure the pay structures of their top team align with company performance.

"We will continue to work constructively with all stakeholders to ensure companies’ pay plans meet their business needs and investors’ expectations."

The IA’s Institutional Voting Information Service (IVIS) will assess all FTSE All-Share companies’ remuneration policies against these principles before they are presented to their companies’ AGM for a binding vote, and will provide a colour-top for their report to reflect the level of concern shareholders should have with the policy. Companies which see a vote of 20% or more against their remuneration policy, or pull their policy before a vote, will be added to the IA’s Public Register of shareholder dissent.

For the IA's 2019 Principles of Remuneration, click here.

For the IA letters to the Chairs of FTSE 350 Remuneration Committees, click here.