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18 Nov 2015

The Investment Association publishes its Principles of Remuneration 2015


Updated Investment Association Principles of Remuneration (the Principles) were published on 11 November 2015 together with a letter to remuneration committee chairmen, setting out the areas of current concern for shareholders.

The Principles are relevant to those companies whose shares are traded on the main list of the London Stock Exchange.  However, in recent years, an increasing number of AIM companies are also choosing to comply with them.

Summary of changes to the Principles

Only one change has been made to the Principles. With respect to long term incentives, the Principles previously recommended that performance periods should be linked to business strategy and should be no less than 3 years, and that additional holding periods may be appropriate.

The revised Principles say that additional holding periods are "expected" by investors so that in total, the performance period together with the holding period should span at least five years.  In practical terms this means any long term incentive awards with a three year vesting period should be designed so that award holders are required to hold shares acquired for an additional two years after vesting.  Companies will need to consider how any holding period can be effectively policed.

Current issues of concern for shareholders

Although only one change to the Principles was made, companies should be mindful of the areas of concern to shareholders identified in the letter to remuneration committee chairmen.  These are:

  • Salary increases – the level and frequency of salary increases continue to be of concern to shareholders.  Accordingly, all salary increases should be clearly justified, particularly those that exceed inflation or the increase provided to the general workforce.
  • Bonus disclosure – last year, the importance of retrospective disclosure of annual bonus targets was highlighted.  The letter reiterates that bonus targets should be disclosed at the end of the performance period, to provide shareholders with evidence of an appropriate link between pay and performance.

    A number of companies do not provide details of their bonus targets or consider them to be commercially sensitive.  Appendix 1 of the Principles, which sets out the Investment Association's views on the practical aspects of the reporting requirements, now provides that shareholders expect companies that consider their bonus targets to be commercially sensitive to explain why, and to specify when they will disclose the targets in the future.

    Most notably, the letter goes on to provide that shareholders have asked IVIS (which produces reports on companies in relation to compliance with corporate governance best practice) to issue a "Red Top" to those companies that do not disclose performance targets or do not commit to full future disclosure.  A "Red Top" indicates that there are major concerns with elements of a company's compliance with good corporate governance standards. This new policy takes effect for companies with a year end on or after 1 December 2015.
  • Service contracts – notice periods should be the same for both the company and a director. The letter confirms that shareholders still favour notice periods of up to 12 months. Companies should include clauses in new contracts to allow pay in lieu of notice to be withheld where a regulatory or internal disciplinary or misconduct investigation is underway.

    This appears to be another way of giving effect to malus and clawback, which listed companies are expected to apply to remuneration in certain circumstances.
  • Pensions – pension arrangements for executive directors should be in line with those for the remainder of the work force.
  • Recruitment and leaving arrangements – Shareholders will scrutinise buyout awards as they consider newly recruited executives should not be protected against the risk that the company's value may fall.  Remuneration committees are also encouraged to take a "firm approach" to determining whether a person is a good or bad leaver and to justify fully treating somebody as a good leaver.

What next?

The letter explains that the Investment Association's Executive Remuneration Working Group is expected to announce proposals on the simplification of executive pay in Spring 2016.   This goes someway to explain why there has only been one change to the Principles this year and it seems likely that more significant measures will be announced next year.

In the meantime, the letter to remuneration committee chairmen is sending out a loud and clear message – shareholders expect clear and timely disclosure of remuneration matters together with explanations and justification of actions taken in respect of executive pay.  This will come as no surprise to anyone, but acts as a useful reminder that shareholders are prepared to take action where there is a lack of compliance with good corporate governance standards.

We will keep you updated on any further changes.

Read the full text of the Principles



Barbara Allen

Barbara Allen

T:  +44 20 7809 2231 M:  +44 7771 531 553 Email Barbara | Vcard Office:  London