The Investment Association (IA) has published its annual letter to remuneration committee chairs as well as its updated Principles of Remuneration.

The Principles have been updated to reflect developments in market practice and investor expectations, including:

  • Linking executive pay and ESG targets – Where companies link executive pay and bonuses to ESG metrics, the rationale for doing so should be robust and clearly explained to investors. ESG metrics should be quantifiable and linked to the company’s strategy. Where companies have incorporated climate-related risks and opportunities into strategies, these risks and opportunities should be similarly reflected in remuneration structures (or where this has not been done yet, companies should explain how this will be done in future years).
  • Grant size – Where share prices have fallen, the Principles now reflect investor preference for remuneration committees to reduce the size of awards at the point they are granted, rather than relying on discretion when awards later vest.
  • Increasing remuneration – Remuneration committees should provide a clear justification for an increase to any element of, or the overall level of, remuneration. The IA notes that even a small increase to salary may lead to a substantial increase in overall remuneration as a result of the “multiplier effect”.

As previously announced, to support the alignment of executive pensions with those of the workforce by 2022, the Principles reiterate that IVIS will red top:

  • any new remuneration policy that does not explicitly state that any appointed executive director will have their pension contribution set in line with the majority of the workforce; and
  • any remuneration report where executive pension contributions are not aligned to the rate for the majority of the workforce or there is not a credible action plan to align pension contributions for incumbent directors by the end of 2022.

The IA has also confirmed that its additional guidance on shareholder expectations on executive remuneration during the Covid-19 pandemic will continue to apply during the 2022 AGM season. The guidance covers how remuneration committees should approach executive remuneration in the context of various Covid-19-related topics, including where the company has received Government support, raised capital from shareholders or suspended or cancelled its dividend.