Updated principles of remuneration aim for a competitive UK listing environment

Listed companies in the UK should take note of several important changes to the executive pay guidance as the 2025 annual general meeting (AGM) and reporting season approaches, legal experts have said.

The long-awaited update comes after an open letter sent by the IA to remuneration committee chairs in February, indicating the need for an in-depth review of remuneration policy guidelines. The simplified framework, which consists of three overarching principles and supporting guidance, brings important changes to executive pay practices and offers remuneration committees flexibility to adapt pay structures to best suit their companies’ business and strategy. The IA emphasises that these are “principles” and “not rules”, and that investors will analyse the suitability of pay proposals on a “case-by-case basis”, noting that each company should adopt a structure that makes sense for its business and the market in which it operates.

Lynette Jacobs, a share incentives expert at Pinsent Masons, said that some significant changes in the updated principles “reflect the growing momentum for a boost to the competitiveness of the UK as a market for companies to list in and to put UK public limited companies (PLCs) in a better position to attract and retain senior executives in the global market.”

As an example, she pointed out, the inclusion of specific reference to both ‘restricted share plans’ and ‘hybrid share plans’ being acceptable will be welcomed by many UK PLCs that struggle to compete on remuneration packages for senior executives compared to their US and European peers.

However, the retention of a default discount of 50% to award sizes under restricted share plans, as opposed to traditional performance share plans, will continue to put UK companies at a disadvantage, according to Jacobs, although the principles do note that “depending on the company's circumstances and the performance measures used in the previous plan a different discount rate may be considered appropriate”.

James Sullivan-Tailyour of Pinsent Masons, who also specialises in share incentives, said that some of the changes to the principles will be of particular benefit to listed companies. “Notably, the requirement for listed companies to have an ‘inner’ 5% dilution limit that applies to their discretionary share plans has been removed, and there is also some limited wriggle room for certain high-growth companies to adopt an overall dilution limit of more than 10%,” he said.

The 10% limit that captures both discretionary and all-employee schemes is now the only dilution limit suggested by the IA under the updated guidance.

Another notable change sees the IA strengthen its expectations on the robustness of listed companies’ policies and practices for applying malus and clawback.

“Listed companies should ensure that those powers of malus and clawback are consistently applied and are enforceable. It may well be the case that more listed companies look to put in place overarching malus and clawback policies that apply to all of the company’s variable remuneration. These policies are very helpful in providing remuneration committees with clarity on the process for applying malus and clawback and the circumstances in which they can do so,” said Sullivan-Tailyour.

Lynette Jacobs also referred to the positive ‘relaxation’ on bonus deferral in the updated principles. She said: “The seemingly ever-increasing restrictions imposed by the Corporate Governance Code on executive equity incentives are said to have reduced their motivational effect on senior executives. The updated principles take a step to redress this by referring to the potential for a reduction in the required level of bonus deferral into shares for a director who has met their company’s shareholding guideline, provided the company’s remuneration committee retains sufficient ability to enforce malus and clawback.”

Another change to the principles will see the removal of the requirement for a 10-year plan life for ‘all-employee’ share plans. However, Jacobs said: “It is likely that the majority of companies will continue to apply the maximum ten-year period to all of their plans, whether discretionary or all-employee, on the basis that it is a catalyst for the company and its shareholders to review and, as appropriate, update the plans.”

Companies are reminded to consider if any amendments they may make to their share plans in response to the amendments to the principles require prior shareholder approval. Similarly, they will need to be aware if shareholder approval will be required for associated amendments to the company’s policy on directors’ remuneration policy.

According to Andrew Ninian, director of stewardship, risk and tax at the IA, the updated principles set out the main areas that investors are interested in and that investors “expect early engagement on any potentially novel changes”. The IA’s guidance makes it clear that it is crucial for remuneration committees to engage with their major shareholders to understand their views and provide clear explanations as to why the pay approach is right for their business, company strategy and shareholders.

Better alignment between shareholders and companies, as shown by the IA’s statistics, has contributed to a positive 2024 AGM season with the number of pay resolutions receiving significant dissent falling by 50% compared to 2023.