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High pay under fire in toughened investor rules

Thursday 22 November 2018

The Investment Association (IA) has today published updated executive pay guidelines in light of investor concerns that companies are not listening or responding to shareholders over pay. These ‘Principles of Remuneration’ are being launched at the IA Stewardship and Corporate Governance conference, which brings together top executives, regulators and policy-makers to discuss the current state of UK corporate governance.

The 2018 Principles of Remuneration set out investor expectations and best practice for how companies should pay their top executives in line with the new Corporate Governance Code. Under the new Principles, investors will expect companies to:

  • Pay pension contributions to Directors in line with the rate given to the majority of the rest of the workforce, rather than giving higher payments as a mechanism for increasing total remuneration;
  • Broaden the triggers under which malus and clawback provisions can be used to forfeit or recover remuneration beyond the current triggers of ‘gross misconduct’ and ‘misstatement of results’, in order to make them a more effective tool to recover bonuses. Companies should also set out the process for implementing malus and clawback, not simply the triggers;
  • Require Directors to hold a proportion of their shares for a minimum of two years after their departure, so that they consider the long-term value of the company even after their departure;
  • Adopt new pay ratio reporting requirements early, to maximise transparency over pay and ensure that there is accountability for high levels of pay internally.

In an open letter to the Chairs of Remuneration Committees of FTSE 350 companies, the IA expressed the growing frustration that many companies were not listening to investor views. This often means that investors have been forced to vote against companies’ remuneration resolutions, which has led to a growing number of shareholder rebellions over the 2018 AGM season.

Andrew Ninian, Director of Stewardship and Corporate Governance at the Investment Association, said:

“Growing shareholder rebellions on executive pay in the 2018 AGM season should come as no surprise to firms that continue to ignore or side-line the concerns of investors. Our updated principles reinforce the crucial role investors play in holding big business to account.

While the vast majority of FTSE 350 companies develop and implement pay policies that align with savers and shareholders’ interests, a stubborn minority still do not respond to shareholder concerns. Our strengthened guidelines make clear that companies need to demonstrate more robustly the link between pay and company performance. If they don’t, they should brace themselves for more shareholder revolts in 2019.”

This year’s review of the Principles took place against a backdrop of new remuneration provisions in a revised UK Corporate Governance Code, and follows a 2018 AGM season that saw increasing dissent on remuneration resolutions in the FTSE 100. This year, as of October 31st, 61 companies were added to the IA Public Register of shareholder revolts for pay-related resolutions - up 9 on the same period last year. Of the 61, 15 are FTSE 100 companies, 23 are FTSE 250 companies and 23 are FTSE Small cap companies.

For more information contact:

Ben Rathe, Senior Communications Manager: ben.rathe@theia.org

T +44 (0)20 7269 4655

David Parton, Communications Executive: david.parton@theia.org

T +44 (0)20 7269 4625

Notes to Editors

  • A copy of the full Principles of Remuneration, and the letter sent to Remuneration Committee chairs, is available on request.
  • The full agenda for the Stewardship and Corporate Governance conference is available here.

About the Investment Association (IA):

  • The IA champions UK asset management, supporting British savers, investors and businesses. Our 250 members manage £7.7 trillion of assets and employ around 100,000 people across the UK
  • Our mission is to make investment better. Better for clients, so they achieve their financial goals. Better for companies, so they get the capital they need to grow. And better for the economy, so everyone prospers.
  • Our purpose is to ensure investment managers are in the best possible position to: o Build people’s resilience to financial adversity
  • o Help people achieve their financial aspirations
  • o Enable people to maintain a decent standard of living as they grow older
  • o Contribute to economic growth through the efficient allocation of capital.
  • The money our members manage is in a wide variety of investment vehicles including authorised investment funds, pension funds and stocks and shares ISAs.
  • The UK is the second largest investment management centre in the world, after the US and manages 35% of all assets managed in Europe.