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Investment Association publishes updated Principles of Remuneration for 2022

The Investment Association (IA) has published the following:

Key changes are summarised below:

Letter to Remuneration Committee chairs

COVID-19 and stakeholder experience

  • The IA will continue to monitor companies against their 2020 guidance on Shareholder Expectations on Executive Remuneration during the COVID-19 pandemic during the 2022 AGM season.
  • The call for companies to show restraint where they have taken and not repaid government support during the year under review and the need not to pay annual bonuses in such cases remains unchanged.
  • Shareholders have welcomed the effort that Remuneration Committee Chairs have taken to consider and disclose how their committee have taken into account the wider stakeholder experience. The IA and its members expect companies to continue to factor the shareholder and stakeholder experience into their remuneration decisions and clearly communicate the approach the company has taken.

Approach to pensions (new and incumbent executive directors)
In line with the IA’s ambition for all executive pension contributions to be aligned to the majority of the workforce rate by the end of 2022, IVIS will:

  • Red Top any new remuneration policy that does not explicitly state that any appointed executive director will have their pension contribution set in line with the majority of the workforce.
  • Red Top any remuneration report where executive pension contributions are not aligned to the majority of the workforce rate or there is not a credible action plan to align pension contributions for incumbent directors by the end of 2022. (removing threshold for pensions of 15% of salary or more)

ESG metrics

  • Where companies are incorporating the management of material ESG risks and opportunities into their long-term strategy, the Remuneration Committees should be incorporating the management of these material ESG risks as performance conditions in the company’s variable remuneration. In doing so they should select ESG metrics that are quantifiable and clearly linked to company strategy.
  • The rationale for the selected ESG performance metrics and targets should be disclosed to investors - as with any other performance condition. This will require identifying quantifiable and appropriate performance metrics as well as setting appropriately stretching performance targets.
  • Where companies have incorporated ESG risks and opportunities into their long-term strategy but have not yet incorporated ESG metrics into their remuneration structures, they should explain to shareholders how they will be incorporating ESG metrics into the remuneration structure and the approach they will take in future years.
     

Updated Principles of Remuneration

Levels of Remuneration

  • Any potential increases to the level of salary should be considered in tandem with the effect this will have on overall quantum. Small percentage increases to salary may lead to substantial increases in overall remuneration.
  • Investors continue to examine how any increases to basic salary or variable pay opportunity are justified, and expect Remuneration Committees to show restraint in relation to overall quantum.
  • Where Remuneration Committees seek to increase base pay beyond the increase awarded to the wider workforce, the reasons and justifications for doing so should be fully disclosed.
  • Any reference to a ‘relevant and fairly constructed peer group’ should be ‘specific and clearly disclosed to investors’.

LTIP grant levels

The Principles have been updated to reflect investor preference for companies to reduce awards at grant where share prices have fallen rather than relying on discretion when awards vest.

Value Creation Plans (VCPs)

Given the increased adoption of VCPs over the last AGM season, the Principles have been updated to include a specific section on investor expectations on VCPs.

  • Strategic Rationale - Investors assess proposed VCPs on a case-by-case basis but are generally sceptical of their introduction. VCPs are not considered a standard arrangement and should only be used where they are appropriate to the specific circumstances of the company. A clear rationale to this effect should be provided.
  • Overall Monetary Cap - Plans should have an overall cap on the number of shares and total value of awards that can be delivered to scheme participants, and the Committee should provide a clear explanation as to why this monetary cap is appropriate.
  • Targets - Given the significantly increased maximum opportunity afforded by VCPs, the targets need to be substantially more stretching and sufficiently robust. The Committee should provide clear rationale as to why the performance targets and percentage of any value created above a predetermined hurdle rate allocated to participants are appropriate.
  • Dilution - committees should be aware of the heightened risk of large levels of dilution presented by VCPs.

Restricted share plans

  • Restricted Share Plans are sometimes introduced in situations where the company has experienced a substantial fall in its share price. Remuneration Committee’s should therefore be especially mindful of the potential for windfall gains when considering the initial grant of restricted shares. Specifically, the 50% discount when compared to the previous LTIP grant levels may be deemed insufficient if there has been a substantial fall in the share price since the last LTIP grant.

Use of discretion

  • The Company should also disclose within the Remuneration Report why the Committee is satisfied that the bonus pay-out is appropriate given that stakeholder experience.
  • When operating discretion, the Committee should also disclose how it has considered the experience of material stakeholders when operating discretion.
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