Revised remuneration policies will be on the agenda for many companies in 2020. This is therefore an opportune time to consider recent institutional investor voting guidance from ISS and Glass Lewis as well updated guidance from the Investment Association on executive remuneration. This is against a background of the requirements of the 2018 edition of the UK Corporate Governance Code which contains many provisions relating to remuneration (see our briefing here).

Institutional investor voting guidelines

Institutional Shareholder Services (ISS) has published its proxy voting guidelines for 2020 and Glass Lewis has published its 2020 proxy paper guidelines for the UK.

ISS Proxy Voting Guidelines

The most important change in the 2020 edition of ISS’s proxy voting policies (which apply to shareholder meetings taking place on or after 1 February 2020) is that the Remuneration Committee should disclose how it has taken into account any relevant environment, social and governance (ESG) matters when determining remuneration outcomes. Such factors may include workplace fatalities and injuries, significant environmental incidents and large fines or sanctions from regulatory bodies.

Glass Lewis Proxy Paper Guidelines

The key changes to the Glass Lewis guidelines this year relevant to remuneration are that pension contributions should reflect those awarded to the wider workforce and that Remuneration Committees should exercise discretion to reduce bonuses or option awards where a company has suffered an exceptional negative event, even if formulaic targets have been met.

HSF comment

ESG considerations are of increasing importance to managers of investment funds. Companies are therefore starting to align their corporate governance with shareholder ESG requirements. Investors are using ESG as an investment criterion and expect ESG to be part of the performance criteria for short and long-term executive remuneration.

ESG considerations are, in fact, already part of the Investment Association’s Principles of Remuneration, stating that “Remuneration committees should consider including strategic or non-financial performance criteria in variable remuneration, for example relating to environmental, social and governance (ESG) objectives, or to particular operational or strategic objectives. ESG measures should be material to the business and quantifiable. In each case, the link to strategy and method of performance measurement should be clearly explained”. ISS clearly also see ESG as part of the next wave of corporate governance emphasis and we are likely to see more voting recommendations based on ESG outcomes.

Directors’ remuneration – IA Letter to Remuneration Committee Chairs and updated Principles of Remuneration

The Investment Association (IA) has published its annual letter to Remuneration Committee Chairs and its updated Principles of Remuneration.

IA Letter to Remuneration Committee Chairs

For 2020, the key issues highlighted by the IA in their letter to Remuneration Committee Chairs are:

  • Discretion on vesting outcomes – The IA recommends that remuneration committees introduce discretion into their incentive schemes which would allow them to limit the vesting outcomes if a specific monetary value is exceeded.
  • Pension contributions – The IA’s expectation is that remuneration committees set out a credible action plan to reduce the pension contributions of incumbent directors to the level of the majority of the workforce by the end of 2022.
  • Shareholding requirements – Shareholders expect post-employment shareholding requirements to be introduced for all new remuneration policies put to shareholders in the forthcoming AGM season.

Updated Principles of Remuneration

The Principles have been updated in line with the key issues highlighted in the letter to Remuneration Committee Chairs. Other areas to note include:

  • Leaver provisions – New guidance has been added regarding payments to departing directors, including that payments in lieu of notice should only consist of contractual entitlements and be limited to salary, pensions and any benefits.
  • Pensions – Pension contribution rates should be aligned with those for the majority of the company’s workforce. The remuneration report should set out the pension contribution rate which the company considers to be given to the majority of the workforce, and an explanation of how the rate was determined
  • Cap on pay – Companies need to justify increases to salary and variable remuneration and IA members continue to be concerned with incremental changes which result in large increases. Following a decrease in share price, grants should be scaled back. In addition, Remuneration Committee should consider having discretion to cap the vesting levels of incentive plans to a specific monetary value (although it is for the Remuneration Committee to decide on the appropriate level and how it would be implemented).
HSF comment

Reserving discretion to cap vesting to a specific monetary value is in line with the FRC Guidance on Board Effectiveness suggesting that Remuneration Committees should consider placing a monetary limit on what they consider a reasonable reward for individual executives (although this has not become common to date). This may be more appropriate in one-off incentive plans (often referred to as “value creation plans”) where significant pay-outs are often seen. Notwithstanding that this may be linked to significant share price growth, shareholders remain more supportive of annual phased grants.

By contrast, having appropriate discretion to ensure that pay outcomes correspond to company performance and are not excessive has become more common. The Corporate Governance Code 2018 (and associated FRC Guidance on Board Effectiveness) requires Remuneration Committees to have the ability to override formulaic outcomes of bonus arrangements and LTIPs. Last year, at least 9 FTSE 100 companies overrode a formulaic outcome for an annual bonus and at least 5 FTSE 100 companies overrode a formulaic outcome for an LTIP.


With the next annual cycle of bonus and LTIP awards coming up soon for many companies, as well as the introduction of new remuneration policies, now is the time to do a health check to ensure that bonus and LTIP rules cover off all the legal niceties required to ensure that wider malus and clawback circumstances are incorporated, to ensure that shareholding requirements (both during and after employment) are met, and to ensure that Remuneration Committees have power to override formulaic outcomes.

Please contact any member of the HSF Remuneration & Incentives team for assistance.