Investors review pay guidelines in light of UK competitiveness debate

Investment managers have today reiterated the need for clear alignment between pay and performance, as investors look to work together with companies to boost the competitiveness of the UK listing environment and executive pay practices. 

In a letter, which was sent to FTSE 350 companies’ Remuneration Committee Chairs, the Investment Association (IA) outlined how investors will engage with investee companies on executive pay in the 2024 AGM season. This comes ahead of the formal publication of its updated Principles of Remuneration, which is expected later this year, as the IA concludes its review of the pay guidelines to ensure they reflect current market thinking and are simplified, as well as providing the flexibility for companies to adapt their pay structures to best suit their business and strategy. 

In what is set to be another challenging year, investors will look to support company boards with the ongoing need to navigate the inflationary environment in order to motivate and reward all of their employees, including senior executives, to deliver a positive performance. Investors will also consider whether executive pay outcomes are appropriate given the performance achieved during the year, as well as how the committee has set targets for 2024. 

This year follows a positive 2023 AGM season, which saw the number of pay resolutions receiving significant dissent fall by 18% compared to 2022. This reflects the strong alignment between shareholders and companies on executive pay in relation to the cost-living crisis and windfall gains.  

As part of the IA’s engagement with companies, the trade body has also consulted with nearly 100 companies in the FTSE 350. From these conversations, there was no consensus on the one single issue which could be resolved to improve the competitiveness of UK executive pay. However, three themes were highlighted by companies, including: the need to increase pay opportunities through LTIP grant levels, the use of hybrid schemes, and the requirements in the UK Corporate Governance Code which reduce the perceived value of remuneration. Investors, together with companies, will need to assess on a case-by-case basis proposals on pay awards and hybrid schemes based on the company’s individual circumstances. As market practice develops, the IA will be updating its Principles of Remuneration to reflect these developments.  

Andrew Ninian, Director of Stewardship, Risk and Tax at the Investment Association, said,  

"Investors want a competitive UK listing environment that attracts high quality companies to list and operate in the UK and are working with companies to understand how the structure of executive remuneration can help achieve this. Ultimately, investors want to see companies succeed and deliver long-term returns to their shareholders, with management and the wider workforce being rewarded for delivering that success.”