Our summary of the key highlights and changes to the IA’s Principles of Remuneration and their focus areas for 2020.
On 1 November 2019, the IA released its updated guidelines on executive remuneration, outlining their principles and focus for the 2020 AGM season. The updated Principles were accompanied by a letter to Remuneration Committee chairs of FTSE-350 companies which highlighted the main changes from the previous guidelines.
The main focus of the IA is for their member’s investee companies to generate long-term sustainable value and the revised Principles have been developed against the backdrop of uncertain political and economic climate and the ongoing scrutiny of high executive pay.
The changes to the guidelines support an on-going drive to achieve greater alignment between executives and investors.
We summarise the key highlights below.
Alternative Remuneration Structures
Due to the ongoing debate as to whether traditional Long Term Incentive Plans drive the right behaviours or create the best outcomes for shareholders the IA are encouraging Remuneration Committees to evaluate their plans to ensure they are fit for purpose.
The amended principles suggest that investor shareholders could consider alternative structures if these are more suitable and there is a strong strategic rationale and benefit of implementing an alternative long term scheme.
Discretion on vesting outcomes
Discretion has become an important tool for Remuneration Committees to control executive pay levels. The IA have further expanded this principle in relation to incentive schemes.
The updated principle encourages the introduction of the use of discretion in incentive schemes to allow Committees to limit the vesting outcomes, if they exceed a certain monetary value.
Approach to pensions
Executive pensions continue to be a hot topic and the IA have reiterated the importance of companies aligning their executive pensions with the wider workforce. Where changes are not made immediately, it is vital that a clear plan for the reduction of pension contributions is put in place with all executive pensions being aligned by 2022, per the previously released guidance.
Shareholding requirements (including post-employment)
With the expectation that a large majority of companies will be renewing their policy during the 2020 AGM season and following the updated Principles last year which outlined which shares counted towards the minimum shareholding, the IA will be expecting to see all new Policies to be updated to include provisions on post-employment shareholding requirements.
Pay and performance
Investors continue to apply a high level of scrutiny to levels of remuneration as well as requiring a detailed justification for increases in both fixed and variable pay. There is an expectation that Remuneration Committees will exercise restraint on levels of remuneration, there is also a focus on performance conditions requiring robust transparency on financial, strategic and personal targets.
There is a renewed focus on the inclusion of non-financial targets which require executives to think more strategically about other areas which may affect the business, particularly Environment, Social and or Governance objectives.
KPMG’s Reward Consulting practice regularly advises clients on wide range of remuneration issues including policy design, pay benchmarking and shareholder consultation exercises.
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