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Updated investor guidance on executive pay for UK listed companies

Posted on 26 November 2020

Both the Investment Association (IA)* and Institutional Shareholder Services (ISS)**, have recently updated their influential institutional investor guidelines on executive remuneration in advance of the 2021 AGM season. The IA has also updated its guidance on executive pay in the light of the continuing COVID-19 pandemic. 

Updated IA COVID-19 guidance

The IA first issued guidance on how remuneration committees should respond to the COVID-19 pandemic in April 2020. The tenor of that guidance was that remuneration committees should carefully balance the need to continue to incentivise executives while ensuring that an executive's remuneration aligns with the experience of shareholders, employees and other stakeholders. Many remuneration committees took action which reflected that approach, ensuring that executives would not benefit from the government's direct financial support of their companies and putting in place mechanisms so that executives would not receive windfall gains.

The updated COVID-19 guidance continues in the same theme as the original guidance and the main recommendations are summarised below.


  • There should be no bonus payments for FY2020 or FY2020/21 where a company has accessed direct Government support, such as the Job Retention Scheme or Government loans, or where a company has raised additional capital from shareholders, unless there are "truly exceptional circumstances".
  • If a company has benefited from indirect Government support, such as business rate relief, and that has had a significant positive impact on financial performance then the remuneration committee should disclose how that has been taken into account when determining remuneration outcomes. 
  • Bonuses should be reduced if a company suspended or cancelled its dividends in relation to FY2019 or FY2019/20 and the remuneration committee should disclose how it did this, such as by exercising discretion in relation to FY2019 bonuses or by reducing FY2020 bonuses.
  • There should be no changes to the performance conditions applying to the current bonus performance year.

Long Term Incentives

There should be no changes to the performance conditions applying to "in-flight" long term incentive awards. The IA ask that remuneration committees include an appropriate negative statement in their remuneration reports if they have not made any such changes. 

Existing LTIP awards should not be cancelled and replaced with new awards. In addition, remuneration committees should not provide executives with higher variable remuneration opportunities in 2021 to compensate for lower remuneration received in 2020 due to the pandemic.

Measures should be taken to avoid windfall gains from long term incentives, including reducing award sizes at the time awards are made if the share price has fallen substantially from historical levels. When performance targets are set they should be sufficiently stretching and not set with a view to compensating executives for lower remuneration outcomes as a result of the pandemic. 

Companies should not move from performance based LTIP awards to restricted share awards (which do not have performance targets) simply because they are having difficulty setting meaningful performance conditions. A move to restricted share awards should only occur where there is a strategic rationale for doing so. A number of companies made such a move last year but they were started before the pandemic struck.

New remuneration policies

  • While the pandemic continues it may not be an appropriate time for remuneration committees to make substantial changes to their executive remuneration arrangements, but minor changes to align with regulations and best practice should still be made. 

Updated IA general guidance

Only minor changes have been made to the IA's general guidance on remuneration for 2021, called the "Principles of Remuneration". This was accompanied by an introductory letter to the Chair of Remuneration Committees, see here. The changes are summarised below.

  • ESG targets – the guidance acknowledges that Environmental, Social and Governance (ESG) targets are becoming more common and accepts that these may be appropriate, but emphasises that these should be linked to company strategy.
  • Non-financial bonus metrics - the guidance notes the rise in the use of strategic targets and/or personal objectives in annual bonus metrics but it emphasises that where personal objectives are used they should be linked to long term value creation. In addition, financial metrics should comprise the significant majority of an overall bonus opportunity.
  • Bonus deferral – where a bonus opportunity is greater than 100 per cent of salary then a portion of the entire bonus should be deferred into shares rather than just a portion of the amount above 100 per cent.  
  • Post-employment shareholding requirement – remuneration committees should disclose the structures or processes it has in place to enforce its requirement that executives hold their company shares for a period after they leave. The requirement for disclosure of the enforcement mechanisms indicates that the IA is looking more closely at these arrangements.   
  • Pensions – the deadline for companies to align their existing directors' pension contributions to the contribution rate available to the majority of the workforce remains as the end of 2022. However, IVIS will now recommend a vote against the remuneration report of any company which has not set out a credible action plan to achieve this and where any director has a rate of 15 per cent or more.

Updated ISS guidance

The updated ISS proxy voting guidelines for the UK and Ireland apply for shareholder meetings on or after 1 February 2021. The ISS guidelines on executive remuneration are generally not as detailed as those of the IA. The main changes are summarised below.  

  • Post-employment shareholdings - shareholders should consider whether there is an appropriate post-employment shareholding requirement in place.
  • Pensions – shareholders should consider whether executive pension contributions are aligned with those available to the wider workforce. 

However, the updated guidance in relation to board composition is more prescriptive. ISS will generally recommend a vote against the chair of the nomination committee (or other directors on a case-by-case basis) if:

  • the board of a FTSE 350 company does not comprise at least one third women – this is in line with the recommendation of the Hampton-Alexander Review on the participation of women on boards; or
  • a company smaller than a FTSE 350 company and does not contain at least one woman on the board.

ISS has slightly relaxed its stance on "overboarding", where directors are considered to have too many board appointments at other listed companies, by indicating that it will take a more lenient view where directors are on the boards of non-complex companies, such as investment companies.

If you have any questions on these investor guidelines or would like to discuss them further, please contact Neil Sharpe, neil.sharpe@mishcon.com

*The IA is one of the UK's main providers of guidance on executive remuneration and represents its members from the UK investment management industry.  **ISS is a leading proxy voting agency. 

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