Investment Association: UK should be competitive on senior pay

The letter sets out views on issues the IA expects to be important to members during the AGM season. The announcement also confirmed that the IA’s Principles of Remuneration, which would normally have been updated last November, will remain unchanged for now with an update expected later this year.

The delay is due to IA roundtable meetings in September last year, generating discussions around pay implications and more generally around the competitiveness of the UK as a listing environment. IA members are aiming for a competitive UK listing environment in order to attract companies to list and operate in the UK as well as to prevent companies currently listed in the UK from moving their listing outside of the UK.

Lynette Jacobs of Pinsent Masons, who specialises in share incentives, said: “The Investment Association’s desire ‘to get it right’ is evidenced by the meetings and roundtables it has held with remuneration committees and companies and its delay in updating the principles to conduct a more fundamental review of them in light of the feedback it received from companies and its members’ expectations.”

Companies may take particular interest in the IA’s recognition of the need for the UK to be a competitive marketplace. Jacobs said this “will be appreciated by all, and particularly truly large companies who compete in the international space for senior talent, especially the US.”

The IA objectives also include further support for higher potential pay levels, with a clear alignment between pay and performance. The letter said that the IA aims to work collaboratively with remuneration committees to achieve the right structure for companies, executives, stakeholders, shareholders and ultimately pension savers and the UK economy.

The IA’s Principles of Remuneration are guidelines rather than rules and aim to help firms align pay with investor expectations. The guiding principles are designed to be flexible and adaptable to the circumstances of different companies depending on factors such as company size and areas in which they trade. It means that companies can choose the remuneration structure which is most appropriate for their business strategy and a remuneration approach which the directors consider will deliver business performance and long term returns to shareholders.  

“The tone of the IA letter, and our understanding is that the IA is sympathetic and open to representations from companies regarding low levels of quantum and directors feeling disincentivised due a perceived reduction in the value of their remuneration,” Jacobs added.

The letter does also note that whilst inflation has fallen significantly in the last year, it is still relatively high so that investors would expect companies to remain cautious in 2024, being clear on, amongst other matters, as to how they have considered salary increase for executives in the context of all-employee salary increases.

Companies wishing to implement incentive arrangements which are “outside the box,” whether in terms of structure or award quantum are “strongly advised to consult with larger shareholders as it remains likely that such arrangements will only be blessed by shareholders in exceptional circumstances,” James Sullivan-Tailyour of Pinsent Masons, who also specialises in incentives said.  

However, Nicky Griffin of the Pinsent Masons’ incentives team said that the IA’s emphasis on the fact not one size fits all as far as remuneration guidelines are concerned may be considered “ironic.” She said: “There is an argument that the convergence towards one particular model is caused by the desire for most companies to fit squarely within the guidelines in order to ensure a green voting suggestion from the IA. However, as it is noted, the IA is at pains to emphasise that the guidance is just a set of principles and does not constitute a set of rules. Hopefully, this means that there will be increased flexibility in the approach.” 

“A move away from the ‘comply or explain’ model on which adherence to the Corporate Governance Code is currently based, to an ’apply or explain’ concept as advocated by the Capital Markets Industry Taskforce in its November 2023 letter (7 pages / 97 KB) may facilitate the adoption of alternative incentive arrangements and higher quantum, supported by robust justification”, says Helen Hibbert, a member of the Pinsent Masons incentives team.  Hibbert noted however that whilst the FRC might be accepting of this approach, change will also require buy in from proxy agencies.