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16 Nov 2022

Investment Association issues its annual update on director remuneration in listed companies


Each year, at around this time of year, the Investment Association (taking over the role formerly operated by the ABI) sets out its remuneration expectations for directors at listed companies. Its reason for publishing them now is to exert maximum influence over final deliberations on remuneration outcomes and new awards at December year end companies, and pave the way for decision-making in other companies with later year ends.

As a body, the Investment Association may not now be as influential as it was in affecting shareholder voting decisions on remuneration matters – and other investors and investor groups are also now setting out or consulting on their own views – but the Investment Association produces the fullest and benchmark guidance and so companies and their advisers still focus on what they have to say.

No substantive changes in 2023

This year there are (again) no substantive changes to the Investment Association's views on pay structures. For example, no new views have been expressed on restricted share plans as an alternative to performance share plans or LTIPs, maximum share plan dilution or the strong prohibition on non-executive director participation in incentive schemes. In that sense, the "ABI guidelines", of which the IA is now the custodian, remain the same.

However, in an accompanying letter to chairmen of remuneration committees, the Investment Association draws out particular concerns as follows, few of which will be surprises:

Maturing/vesting 2020 awards

This is specific for this year, though illustrates a trend. Many long-term awards made in 2020 were made at a time of share price volatility and dramatically low share prices. There was also uncertainty as to what appropriate performance conditions should be in what then seemed a complete maelstrom at the start of and in the early days of the pandemic in March and April 2020.

2023 marks the year those awards vest after their three year vesting period, and so remuneration committees must now take decisions as to the appropriate vesting levels. When the 2020 awards were made, the Investment Association gave companies a choice of reducing the numbers of shares under award at the outset in order to reflect what was then perceived to be an artificially low share price or reserving discretion until 2023 and then taking action to avoid windfall gains being received by employees on vesting. Many companies preferred the latter approach, perhaps in the hope that the issue would fall away. It has not and the Investment Association says companies should expect that shareholders will be exercising particular scrutiny with this year's vestings. However, without any guidance as to what windfall gains look like, given the pandemic was just the start of a series of exceptional world events, it is not clear how a temporarily low share price in 2020 can be isolated from all these other events or their impact on performance conditions, with geopolitical and economic uncertainty now likely to be an enduring feature of business life for some time.

Cost of living crisis

Companies are also expected to show restraint in executive director salary increases as well as their general reward outcomes taking into account the wider economic and political picture. There has been movement here in that it may no longer be acceptable for salary rises to increase in line with workforce pay but instead an expectation that executive pay may actually appropriately increase at a lower rate. Executive pay is also not expected to ignore supplier, customer, workforce or the broader political landscape. Companies are not expected to remunerate with a tin ear to the world around them.

If an executive joins at a salary which is expected to rise quickly as the executive grows into the role, companies should make this clear and justify it in advance. This is a particular point to bear in mind when an executive is appointed into (or promoted into) a role and a point that an executive should bear in mind on taking up the job.


ESG targets are now becoming a regular feature of executive remuneration. Mixed views are reported as to targets and outcomes but, as the ESG focus matures, this is a reminder that things have moved on from early aspirational or even soft targets. Investors are looking for focused and measurable goals aligned to a broader ESG picture.

NED fees

There is a suggestion that these have fallen behind and that companies will get a sympathetic hearing if they put forward a reasoned approach. Certainly the role of an NED is increasing all the time. While to some extent this is matched by additional committee fees to cover new roles, this does not wholly reflect the extended commitments being sought. NED pay understandably has much less attention than executive director pay. Companies may be unwilling to open up remuneration battles on an additional front preferring just to have issues with their executive remuneration, but with inflationary pressures as they are, three yearly reviews may no longer be sufficient.

Way forward for 2023

The concerns listed above are not new "mood music" for companies to consider. Yet, to a degree that was not seen after the 2008 financial crisis, the Investment Association and other investors now expect companies to react to much wider stakeholder concerns and intervene by using discretion in the share plans to prevent formulaically reached outcomes being paid out. With the increasing level of discretion that companies have given themselves, remuneration committees now have more ability to flex payouts than they have ever had, but that has actually made the job of remuneration committees even more difficult.

While few would argue against these concerns as general comments, quite how the desired outcome is achieved in a specific company situation is another question, particularly for companies that are not in the FTSE 350 or even on the main market. There are a few red lines, but generally this is a very nuanced debate in each company where investor guidelines are now often only the starting point. Companies will have a difficult path to tread. On the one hand they need to deal with the general climate, including media and political attention, individual investors and the company's own specific circumstances. On the other they have a need to incentivise and retain executives who may have already in some cases suffered restraint over the last couple of years, have worked as hard as they have ever done and be contrasting the listed regime with the perceived more generous world of private equity ownership. The balancing act that is executive director pay therefore just becomes even more complicated for companies in 2023 and we would expect to see quite a few companies pushing up against the limits of the guidance if not justifying their departure from it.

Click here for a link to the Investment Association guidance.