The Investment Association (IA) released the latest edition of its Principles of Remuneration, along with its annual cover letter, on 9th November 2022, signalling areas of particular focus for institutional investors in 2023.

The IA’s Principles of Remuneration are the main source of investor guidance on executive pay for UK listed companies.  No significant changes have been made to the Principles this year, although they now include further guidance in relation to non-executive director fees.

However the IA have highlighted areas of particular focus for its member investors for 2023 in its annual accompanying letter to FTSE 350 company Remuneration Committee (RemCo) chairs, including:

• Pay levels in light of the cost of living crisis: –
  Additional restraint should be shown in relation to executive director salary increases and variable pay opportunities in light of the current cost of living crisis, bearing in mind also the inflationary impact where variable pay is linked to salary. Wider performance ranges and discretion may be needed to ensure that the appropriate outcomes are achieved. 

Overall RemCos will need to carefully navigate the general economic uncertainty when judging pay outcomes and setting remuneration in the coming year, and sensitively balance the need to incentivise executive performance with ensuring the executive experience is commensurate with that of shareholders, employees, and those most impacted by the cost-of-living crisis, including vulnerable customers, suppliers and other major stakeholders.

Windfall gains on long-term incentive plan (LTIP) awards: –
RemCos must consider whether LTIP vesting outcomes in 2023 should be reduced to counter any windfall gains arising as a result of the grants having been made during the COVID-19 pandemic, when the share price may have fallen significantly.  RemCos must show that they have given due consideration to any windfall gains, and explain why any decision to adjust or not to adjust for them is considered appropriate.

• The use of environmental, social and governance (ESG) related measures: –
  The IA reiterate its expectation for all companies to clearly explain their progress and goals in incorporating into their variable pay structures ESG-related metrics that are quantifiable, linked to the company’s strategy and not unnecessarily complex – noting that some its members expect all companies to have already incorporated material ESG measures into their executive pay structures.
  
• Pension contributions: –
  The IA re-emphasise that executive director pension contributions should be aligned with those available to the majority of the company’s workforce by the end of 2022. For 2023, IVIS will Red Top any remuneration policy or report that does not comply with this.

Other large investor bodies are expected to publish updates to their voting guidance on executive pay and other corporate governance issues in the coming weeks.

If you would like to discuss any aspect of your remuneration policy, please contact kathy.granby@lewissilkin.com or victoria.goode@lewissilkin.com