With the unveiling of the UK Corporate Governance Code 2024, and a recent letter from the Investment Association to remuneration committee chairs, there is a renewed focus on the remuneration practices of the UK’s largest companies.
It’s clear that the Financial Reporting Council (FRC) and the Investment Association (IA) are seeking to address what they believe to be an ongoing power struggle between the competitiveness of the UK listing environment (including its remuneration practices) and its ability to provide positive outcomes for investors. It remains to be seen how the approach of UK companies to executive remuneration may develop in the pursuit of this aim.
UK Corporate Governance Code 2024
The UK Corporate Governance Code is a set of principles and guidelines aimed at promoting good corporate governance practices for all companies with a UK premium listing. One of its key components is executive remuneration.
On 22 January 2024, the FRC published a new version of the UK Corporate Governance Code, the majority of which will apply to financial years beginning on or after 1 January 2025. As the FRC itself admits, the new version of the Code focusses on a “limited number of changes”, with it being somewhat of a surprise that several of the proposed revisions to the Code, previously put forward by the FRC in a 2023 consultation paper, have not been taken forward.
The main remuneration-related change made by the 2024 Code is that directors’ contracts, as well as other agreements or documents which cover directors’ remuneration, should now include malus and clawback provisions. Such provisions would provide the ability for remuneration to be adjusted before vesting of the award, and/or for their recovery after vesting or payment to the director. There has also been a related expansion of the information to be provided in annual remuneration reports, which now includes a description of the malus and clawback provisions, including the circumstances in which such provisions could be used and a clear explanation of the reason why the provisions were used in the last reporting period (if relevant).
It is notable that these new requirements do not go as far as imposing a minimum time period that the malus and clawback provisions must apply for and that, by only being included in the Code, they will not apply to all listed companies, which were both recommendations made by the Government’s BEIS department in 2021.
In an effort to reduce the burden on remuneration committees, the 2024 Code has removed the list of factors which remuneration committees currently need to address when determining executive director remuneration policy and practices.
Investment Association letter to remuneration committees
On 26 February 2024, the IA published a press release together with a letter sent to FTSE 350 companies’ remuneration committee chairs. The letter provides the IA’s review of the 2023 AGM season, together with an update on the key issues which the IA considers are likely to arise in 2024 and the IA’s review of the its Principles of Remuneration.
Of particular interest is the summary provided by the IA of the key points which arose out their discussions on remuneration with FTSE 350 companies in September 2023. Although there was no consensus on one single issue to be resolved, three themes were highlighted:
- Need to increase pay opportunities through long term incentive plan (LTIP) grant levels – companies expressed a need for more flexibility to offer higher LTIP awards to create a remuneration structure which competes with those seen in the US.
- Use of Hybrid schemes – certain companies wanted to use hybrid schemes which incorporate both performance and restricted shares. The benefit of restricted shares, as compared to LTIPs (also known as performance share plans), being that they largely remove performance conditions which make them simpler and provide executives with a more certain payout.
- Requirements in the UK Corporate Governance Code reduce the perceived value of remuneration – the view from some companies is that although the requirements introduced by the Code may increase the long-term alignment of executives and shareholders, the perceived impact on the value of remuneration received is disproportionate. It is still to be determined how successful the 2024 Code will be in alleviating these concerns.
Finally, the IA confirm they will be updating their Principles of Remuneration in 2024. The Principles of Remuneration aim to set out the issues which investors consider when evaluating a company’s remuneration structure and set appropriate expectations for companies. The IA hope that the updated principles will evolve in line with market practice, as opposed to dictating market practice.
With the updates being made to the principles and guidance, it'll be worth keeping an eye on executive remuneration practices, and how they develop, over the next couple of years. Of particular interest to us is whether the number of remuneration committees switching from conventional LTIPs to restricted shares continues to increase!
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.
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