Investment Association toughens rules on executive pay

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The Investment Association (AI) has this month toughened the rules on executive pay after concerns that companies were not listening or responding to shareholders.

The new guidelines, known as the Principle of Remuneration, were launched at the IA Stewardship and Corporate Governance conference earlier this month.

The IA guidelines set out investor expectations and best practice for how companies should pay their top executives in line with the new Corporate Governance Code.

It follows recent research which found that “shareholder rebellions” had increased by more than a quarter in 2018, with executive remuneration remaining a key theme of contention.

During the same period, the latest research shows that executive pay jumped by 11 per cent in 2017, from 3.53 million to £3.93 million across FTSE 100 CEOs.

The IA has summarised the new principles below:

  • 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.

Commenting on the new guidelines, 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.”

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