The Investment Association (the “IA“) has published its 2023 Principles of Remuneration (“Principles“) and annual letter to Remuneration Committee chairs. The IA updates its guidance and writes to Remuneration Committees annually to highlight the key areas of focus it expects Remuneration Committees to consider when approaching remuneration.

There are no substantial changes to the Principles for 2023. However, the IA has highlighted the following issues that it expects Remuneration Committees to be alive to in the coming year:

  • Salary levels and the cost of living: Remuneration Committees should ensure that executive compensation is commensurate to the broader stakeholder experience, taking into consideration employees and customers who may be more vulnerable to the cost-of-living crisis. Acknowledging that the inflationary environment impacts lower-paid workers disproportionately, Remuneration Committees should show restraint and consider whether executive pay increases ought to be below inflation and lower than increases provided to the wider workforce.
  • Windfall gains: Awards granted under long term incentive plans in 2020, during the Covid-19 pandemic, will vest in 2023. Many 2020 grants were made following significant share price falls, meaning a greater number of shares were granted in comparison to previous years. The IA expects Remuneration Committees to exercise discretion on vesting outcomes where share prices have recovered to avoid windfall gains. Remuneration Committees should explain whether they have adjusted vesting outcomes to account for windfall gains and, if they have not, the rationale for not doing so.
  • ESG metrics: The IA acknowledges the increase in the number of companies incorporating ESG metrics in variable remuneration and notes that investor expectations are continuing to evolve such that it is increasingly important for companies to clearly articulate their approach to incorporating ESG metrics into executive remuneration. The IA expects ESG metrics to be linked to company strategy, to be quantifiable and to avoid unnecessary complexity. Companies should explain how progress against these metrics is measured and disclose performance levels.
  • Executive pensions: Following previous IA guidance that executive director pension contributions should be aligned with those available to the wider workforce, the IA has announced that IVIS will red top any remuneration policy or report where executive pension contributions are not so aligned.
  • Nonexecutive director fees: The IA has acknowledged that the role of NEDs has become more complex in recent years and has updated the principles to show its support for NED fees that reflect the increased time commitment and complexity of their roles, so long as such fees are properly explained.

The IA’s updated guidance reflects the broader economic environment in its expectation of restraint over executive pay amidst the cost-of-living crisis, windfall gains and evolving ESG expectations, and is in line with the position taken in guidance issued by other proxy advisors such as LGIM’s 2023 principles.

Given the economic outlook, executive pay will come under even greater scrutiny in 2023 and disclosure in the next remuneration report (including demonstrating how Remuneration Committees have taken account of institutional investor views) will be of crucial importance.