No images? Click here ![]() The Investment Association’s updated Principles and COVID-19 “expectations”The IA has just published its annual update to its Remuneration Principles for 2021 to take effect for companies with financial years ending 31st December 2020 onwards and has also taken the opportunity to refresh its COVID-19 guidance and to recap on “members’ expectations” during the pandemic. The resulting changes to the Principles are few but, as has been the case in recent years, the covering letter that has gone to Remuneration Committee Chairs highlights The IA’s areas of focus such as, this time round, transparency in respect of the mechanisms for enforcing continued post-employment share ownership and also on non-financial performance measures. There is also some toughening of The IA’s position in some areas. The IA, for example, will now ‘red top’ Directors’ Remuneration Reports where incumbent executive directors receive pension allowances or contributions of 15% of salary or more (rather than the previous 25%) and where no credible action plan has been disclosed on how their pensions will be aligned to the majority of the workforce and, where bonus opportunity exceeds 100% of salary, a portion of the entire award should be deferred into shares (previously the guidance was broader and would have allowed, for example, for bonus in excess of a threshold only, e.g. a defined percentage of salary, to be deferred). Similarly, the COVID-19-related concession allowing deferral of setting targets for 6 months has been removed. The IA includes a key sentence in the letter which lies at the heart of the challenge for Remuneration Committees: “Shareholders recognise that Remuneration Committees will want to sensitively balance the need to continue to incentivise executive performance at a time where management teams are being asked to demonstrate significant leadership and resilience, and ensure the executive experience is commensurate with that of shareholders, employees and other stakeholders. Remuneration Committees should be careful not to isolate executives from the impact of COVID-19 in a manner that is inconsistent with the approach taken for the general workforce and should also be cognisant of the pandemic’s impact on society.” The main points to note are:
The IA’s Principles of Remuneration can be accessed here and The IA’s letter to Remuneration Committee Chairs can be accessed here. COVID-19 “expectations” The IA’s COVID-19 guidance is direct in its approach. It both reiterates the themes of the April guidance and updates them. The guidance can be accessed here but in summary says:
FIT’s view: In many ways, the updates provide a good illustration of the issues facing Remuneration Committees over the coming months. Striking a balance between the interests of different stakeholders will rarely have been more difficult. In our experience, the overwhelming majority of Remuneration Committees seek to do the right thing and will be sympathetic to the concerns of investors. However, it is to be hoped that these guidelines will be applied with a degree of pragmatism. For example, many companies renewed their remuneration policies at the 2020 AGM season and, as part of this introduced pension alignment for incumbent executives. Consistent with the guidelines then in force, this often involved reducing rates below 25% immediately and committing to reduce to the relevant all-employee rate from January 2023. The new guidelines suggest that the rate should be tapered down over this period (e.g. 15% in 2021, 10% in 2022 and the all-employee rate in 2023). It is one thing to expect companies which did not do this to now be assessed against a tougher standard. However, the guidelines do not appear to draw a distinction between companies which have made such commitments and those which do not. In our view, it is likely to be counter-productive, in the context of low variable pay and numerous companies still applying salary waivers, to reopen something already settled in good faith. A key element of this year’s remuneration reports will be the need for additional context for decisions taken. Based on recent consultations, shareholders are likely to be supportive in the above example. While many companies may not expect to pay their directors bonuses for 2020, a number will take the view that some element of bonus has been well and truly earned and will wish to pay it out. The IA is also encouraging companies to reduce 2021 LTIP grant levels (rather than retain the typical 2020 approach of granting the full multiple of salary but indicating that ultimate vesting may be reduced to avoid windfalls). There is likely to be a difficult balance for Remuneration Committees to strike as, in our experience, many executives are prepared to accept low out-turns for 2020, and to accept that in-flight awards will lapse, but they will be less content if, even from the outset, 2021 LTIP awards which are all about future performance have been materially reduced. While The IA’s request for companies to “show us your workings” is not unreasonable, it may be more difficult to expect wholesale conformity to all their COVID-19 expectations. We can only hope that their members will adopt a more pragmatic approach in practice as most companies, in our experience, are trying to strike an appropriate balance in the interests of all stakeholders.
If you wish to discuss anything arising from this briefing, please ask your usual contact at FIT or call us on 020 7034 1111 or email us at Info@fit-rem.com. Rory Cray Darrell Hare Matt Higgins John Lee Sahul Patel Iain Scott Katharine Turner Matthew Ward This paper is intended to be a summary of key issues but is not comprehensive and does not constitute advice. No legal responsibility is accepted as a result of reliance on the contents of this paper. This email is confidential. If you are not the intended recipient, please delete the email and do not use it in any way. FIT Remuneration Consultants LLP (FIT) does not accept or assume responsibility for any use of or reliance on this email by anyone, other than the intended addressee to the extent agreed in the relevant contract for the matter to which this email relates (if any). Consistent with data protection regulations, if you would like to review our records relating to your contact details or to request their removal from our systems, please contact us at info@fit-rem.com. While all reasonable care has been taken to avoid the transmission of viruses, it is the responsibility of the recipient to ensure that the onward transmission, opening or use of this message and any attachments will not adversely affect its systems or data. No responsibility is accepted by FIT in this regard. FIT is a limited liability partnership registered in England under registered number OC364396, with its registered address at 1 Duke Street, London, W1U 3EA. |