The Investment Association has published a revised version of its “Principles of Remuneration” guidelines, which takes into account the final report of the Executive Remuneration Working Group (a summary of which can be found in our earlier blog post).  This is backed up by an open letter to the chairs of all FTSE 350 remuneration committees.  This forms part of a pattern of gradual ratcheting pressure on quoted companies in respect of executive pay but is unlikely to have any effect on other policy initiatives that we may expect from Theresa May’s new government (such as annual binding votes on remuneration and employee representation in the boardroom).

The main change in the guidelines reflects the ERWG endorsement of the adoption of a simplified approach to executive remuneration, abandoning the previous “one size fits all” policies based on the salary/benefits/annual bonus/LTIP model (although that model remains acceptable where it fits with the needs of the relevant company).  We will not know until the 2017 reporting season how many of the larger UK quoted companies will decide to take advantage of this new freedom.  It also remains to be seen whether the “Principles of Remuneration” can retain their influence on the market in this new, slightly less prescriptive form.

The revisions to the guidelines are aimed at giving a more streamlined, high-level document that incorporates the ERWG push towards simplified remuneration models.  However, a balance is retained so that elements designed to rein in potentially excessive executive remuneration (such as shareholder dilution limits) can still be found in the guidelines.

The open letter makes some additional points with the 2017 reporting/AGM season in mind:

Levels of Remuneration

The IA has stopped short of directly asking for reductions in executive remuneration, but clearly would like to keep up the pressure on FTSE350 remuneration committees.  Here they are asking for greater explanation of the justification for high levels of pay, making it clear that IA members will be paying particular attention any increases in quantum.

Bonus Disclosure

Failure to adopt full retrospective disclosure of bonus performance requirements, giving the threshold, target and maximum levels will result in an automatic “Red Top” from IVIS (the IA’s corporate governance advisory service).  One particular area of concern on bonus disclosure is that where bonuses depend on non-financial performance indicators (such as personal or strategic goals), the disclosure is often limited to a description of the performance indicators and the outcome in terms of the bonus awarded – the IA is looking for a description of the underlying performance that justifies the level of bonus awarded.  Failure to make adequate disclosure on this will result in an automatic IVIS “Amber Top”.  Companies that find that financial targets have been missed but still pay a bonus on the basis that non-financial performance indicators have been satisfied can expect their disclosure to be very closely scrutinised.

Policy Renewals

Most FTSE350 remuneration policies will be coming up for renewal in 2017 and there are a few reminders of issues that IA members will focus on:

  • disclosing maximum opportunity for every element of remuneration,
  • any retention of discretion to make payments outside of the policy and
  • recruitment policies.

Use of Discretion

Where discretion is used, detailed disclosure of the circumstances and reasoning to justify the outcome is required.


IA members will be looking towards harmonising the approach to pensions for the executive directors and that used for the rest of the workforce, unless clear justifications for differences are given.

It is interesting that, while the letter states that the pay ratios of CEO remuneration against that of “the median employee” and “the Executive team” should be disclosed, the amended guidelines actually are less prescriptive.  Given that the pay ratios between different companies are only a crude representation of the underlying disparities between employee and executive pay in any case, we likely to continue to see little consistency in the way that pay ratios are disclosed.