IA signals move to greater flexibility in UK executive pay structuring

The Investment Association representing some of the largest investors in the UK, has released an update to its principles of remuneration. The principles are designed to shape the landscape of executive pay, aligning it with both evolving market practices and investor expectations. And this is not merely financial news. For HR professionals, this update has implications for designing and managing remuneration strategies.

This year’s guidance has been long-awaited. Historically guidelines are issued annually but this is the first update since November 2022 following a pause in 2023 to gather feedback from almost 100 FTSE companies. The focus has been on reconciling shareholder expectations with the need for flexible remuneration policies that support competitiveness, recognising the challenges UK companies face in attracting and retaining top executive talent. Markets like the US for example, offer significantly more generous packages.

The IA’s principles are less prescriptive than before, granting HR teams more discretion to align executive compensation with both corporate goals and investor priorities. Key areas include the softer guidelines on dilution limits, bonus deferrals, and hybrid long-term incentive plans, all of which impact the structure and transparency of pay packages.

So let’s hear more on this latest update and what it means. Earlier, I caught up with share plans specialist James Sullivan-Tailyour who joined me by video-link from London. I asked James for his main message to employers: 

James Sullivan-Tailyour: “So the main message from these updated IA principles is really in reacting to and responding to the ongoing debate about the competitiveness of UK PLC pay, particularly with respect to the pay that's available for executive directors across the Atlantic, in the USA. What the Investment Association’s principles overall represent is a slight change of emphasis and a greater degree of tolerance for different remuneration structures that are better suited to companies’ particular needs to attract and retain talent from around the world. So whilst the IA in their new principles have not entirely relaxed all of the expectations around benchmarking executive pay and the need to ensure alignment between the pay of executive directors and the pay of the wider workforce, what they are suggesting is that there is a dialog to be had with shareholders about the need to offer more attractive compensation for executive directors so that you can secure that talent, and retain that talent within the organization, to make sure that your pay offer is competitive and that the organization is recruiting the right people, drawing on the right talent from across the world.”

Joe Glavina: “I see the Share Plans team has written an article on this James for Out-Law  saying that UK companies should take note of several important changes to the executive pay guidance as the 2025 annual general meeting and reporting season approaches. What did you have in mind?”

James Sullivan-Tailyour: “Well, I think there are, there are two key areas of change which listed companies may be able to benefit from. The first is that typically companies that are listed on the main market have been required to have two dilution limits that are applicable to their plans, a wider dilution limit of 10% of the company's share capital that applies to all share plans that the company operates, and then an inner limit of 5% of the company's share capital that is relevant only to discretionary share plans that executive directors and senior people participate in. Those 5% and 10% dilution limits apply over a 10-year period. These new IA principles no longer require or expect listed companies to keep to that inner 5% dilution limit, they only refer to the overall 10% dilution limit. So what that is indicating is that the Investment Association is indicating that their members may be more willing to tolerate a greater degree of dilution that flows from executive director and senior leadership share plans and that will help a number of listed companies who have quite limited headroom under that 5% dilution limit and that acts, in some instances, as quite a constraint on how companies can operate their share plans in practice. So, that's very welcome news. Another area that's welcome is that the Investment Association is suggesting that for all employee plans, which tend not to be subject to as great a degree of scrutiny by institutional investors because they operate across all employees, they don't particularly favour executive directors and hire paid employees, what they're suggesting is that those plan rules that are adopted by the company can be adopted on an evergreen basis and don't need to go back to shareholders for approval on a 10-year cycle. So that's quite helpful for listed companies because it means that they don't have to necessarily take those types of share plans back to shareholders for approval at least every 10 years. Having said that, whilst the IA is not expecting that companies do take all employee share plans back to shareholders for approval on the 10-year cycle, some companies, we expect, may continue to do that just from a point of good practice and to make sure that those share plans are subject to periodic review and a refresh on a 10-year cycle. We consider that good practice and we expect that many companies will continue to do that.”

Joe Glavina: “So what’s your main message to HR professionals around this, James? A communications piece to senior managers in the business, perhaps?”

James Sullivan-Tailyour: “I think that understanding the IA principles and the change of emphasis is really helpful because it's signalling that listed companies can have a greater degree of flexibility in structuring remuneration arrangements for senior individuals, particularly executive directors, in a manner which meets their strategic needs and in a manner which enables them to attract the right talent. But it's important to remember that just because the Investment Association is slightly opening the door as to what's acceptable, you still have to bear in mind the existing framework that a company has for paying senior executive directors and senior leadership and if you want to respond to some of the greater flexibility that the Investment Association has afforded by way of their principles, it will be important to bear in mind that you still may be constrained by your shareholder approved directors remuneration policy, and your shareholder approved share incentive plan rules, in terms of whether you can avail yourself of this greater flexibility. So, before any offers can be made to new executive directors that take advantage of this greater flexibility, you may need to think about whether your directors remuneration policy, or your share plan rules, need to be updated to any degree.”

James and the Share Plans team have produced a detailed briefing on what the IA’s updated remuneration principles aim to achieve and how they will affect businesses, especially listed companies. That’s ‘Updated principles of remuneration aim for a competitive UK listing environment’ and it is available now from the Out-Law website. We’ve included a link to it in the transcript of this programme.


- Link to Out-Law article: ‘Updated principles of remuneration aim for a competitive UK listing environment’