The Investment Association (IA) published the long-awaited update to its Principles of Remuneration (Principles) in October 2024. These Principles were substantially rewritten to become significantly less prescriptive than before, opening up the possibility of more diverse approaches to both the quantum and the form of executive pay.
The IA acknowledged, at the time of publication, that the Principles were intended to reflect investor sentiment regarding pay, rather than setting market practice, and that previous iterations of the Principles may have prompted companies to fall into a 'one-size-fits-all' approach to executive remuneration. The new Principles are therefore intended to provide companies with greater scope to introduce more tailored arrangements, provided that they justify to shareholders and stakeholders why this is appropriate.
While the full picture is yet to emerge from the 2025 Annual General Meeting (AGM) season, with around 50 or so FTSE 100 companies having published their annual report in Q4 2024 through to Q1 2025, some trends in relation to annual bonuses and long-term incentive plans (LTIPs) are starting to emerge. It should be noted though that not all of these companies have put a revised directors' remuneration policy to shareholders, limiting the extent to which they are able to make changes in practice to reflect the Principles.
The new Principles are intended to provide companies with greater scope to introduce more tailored arrangements, provided that they justify to shareholders and stakeholders why this is appropriate."
Paul Ellerman
Partner
Are companies putting forward new directors' remuneration policies in light of the Principles?
Quoted companies must seek shareholder approval for a new directors' remuneration policy every three years (or sooner if they want to change the policy).
Over 20 FTSE 100 companies have put a new directors' remuneration policy to a shareholder vote. While many of these companies did so as it was three years since they last put a policy to shareholders, a number of them accelerated the timetable, putting a new policy to a vote before the end of their existing triennial cycle.
Have there been changes to bonus deferral?
Under the revised Principles, shareholders continue to expect companies to have a deferral policy in place but, where an executive director has already met their shareholding guideline, a company may be able to justify reducing deferral levels if it demonstrates that adequate malus and clawback protections are still in place. The previous explicit expectation for deferral where bonus opportunity exceeds 100% of salary has been deleted.
Around half a dozen of the FTSE 100 reporting companies have already reduced the proportion of required bonus deferral where shareholding guidelines have been met, which is consistent with what we are seeing in practice.
Are companies introducing hybrid schemes?
The Principles acknowledge that a "hybrid scheme", under which executives receive a combination of performance-based and service-based share awards, may be appropriate for some companies. Such arrangements are more common in the US and allow a balance to be struck between stretching performance targets and providing executives with certainty that at least a portion of their awards should vest based on service.
Discounts on award quantum should be applied if service-based awards will be offered. The Principles suggest a 50% discount, albeit that this is indicated as being a starting point only, with remuneration committees encouraged to explain the rationale and methodology for determining the discount rate ultimately selected.
Around half a dozen of the FTSE 100 reporting companies have introduced a hybrid scheme so far and we are aware of a number of others considering this.
Have remuneration committees exercised discretion in determining outcomes?
The Principles recognise that discretion should be applied in a balanced and consistent manner, which can have both positive and negative implications for executive remuneration. Positive discretion can be used to reward exceptional achievements or contributions that are not captured by the predefined performance measures or targets. Meanwhile negative discretion can be used to adjust remuneration outcomes downwards if they do not reflect the underlying performance of the company or the individual, or if there are significant adverse events.
Many plans already allow for both upwards and downwards discretion and it was already an expectation in the UK Corporate Governance Code (Governance Code) that the remuneration committee should have the ability to override formulaic outcomes (see Provision 37 of the Governance Code).
So far, around 10 FTSE 100 companies have reported exercising "downwards discretion" to reduce bonus outcomes, whilst five companies have used "upwards discretion" to adjust performance outcomes to reflect better performance than was suggested by the formulaic outcome.
It is worth noting that the majority of revised director's remuneration policies have continued to receive support from shareholders, which shows a welcome acceptance of the flexibility shown by the IA."
Mark Ife
Partner
Has investor sentiment changed?Where companies suffer a "vote against" of 20% or more on remuneration resolutions, as well as appearing in the IA's public register, they are expected under the Governance Code to publish a further statement within six months detailing the outcome of their further engagement with shareholders and any action taken as a result (see Provision 4 of the Governance Code). There have been several shareholder revolts over executive remuneration during the 2025 reporting season so far. The reasons are varied but include:
However, it is worth noting that the majority of director's remuneration reports and directors' remuneration policies have continued to be supported by shareholders, which shows a welcome acceptance of the flexibility shown by the IA (as well as other institutional proxy advisors such as Glass Lewis and ISS). |
Although it is still early days, there are signs that the changes made by the IA to the Principles are being reflected in approaches to remuneration for directors. It is hoped that companies will take advantage of the flexibility now built into the Principles, perhaps leading to more tailored, individualised treatment of remuneration issues (but it is also possible that market practice will coalesce around a limited number of new structures such as hybrid plans).
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