The Investment Association (IA) has written to remuneration committee chairs of FTSE 350 companies setting out the issues it will consider as part of the fundamental review it is undertaking of its Principles of Remuneration.  The letter also details the main themes regarding remuneration identified during the 2023 AGM season and those likely to be important for the 2024 AGM season.

Updated Principles of Remuneration

• The IA is conducting a review of its Principles of Remuneration against the backdrop of concerns around the competitiveness of remuneration practices in the UK.  Changes made must balance shareholder expectations that there be a clear link between pay and performance while ensuring the UK remains a competitive place to list.
• The IA met with FTSE 350 companies to discuss ways to improve the competitiveness of UK remuneration practices from which three main themes emerged:
  • there needs to be more flexibility to offer higher LTIP awards (particularly to attract US executives and to compete in the US market);
  • companies want to use hybrid schemes incorporating both performance and restricted shares (which are permitted in the US and in other jurisdictions); and
  • the combined effect of the remuneration provisions in the UK Corporate Governance Code (including holding periods, shareholding guidelines (including post-employment) and malus and clawback) reduce the perceived value of remuneration.
• The IA intends to simplify the Principles and update them based on evolving views of its members on quantum and hybrid schemes.  The updated Principles will be published later in 2024.

Review of the 2023 AGM Season

• Shareholders were supportive of the approach that companies took to the inflationary environment, focusing salary budgets on lower paid employees and recognising the impact of significant salary increases on total remuneration for executives.  The IA notes that the number of pay resolutions receiving significant dissent fell by 18% compared to 2022.
• With regard to LTIP grants made at the onset of the pandemic, Remuneration Committees provided appropriate disclosures and rationales regarding windfall gains and, where appropriate, vesting outcomes were reduced.

Priorities for the 2024 AGM Season

• While inflation has fallen, investors will still expect companies to remain cautious in 2024 and be clear on how salary increases for executives compare to employee salary increases, the impact on total remuneration for executives and putting executive remuneration in the context of the stakeholder experience.
• Remuneration Committees should demonstrate how remuneration outcomes are appropriate given the performance achieved during the year and how the Committee sets targets for 2024.