The IA’s director of stewardship and corporate governance on investors’ executive pay expectations

Much work has taken place to change the framework around executive remuneration and to put in place measures to ensure that rewards are transparent, reasonable and strongly aligned with an organisation’s strategy.

However, to date, change around executive remuneration has been slow. The executive pay in the FTSE 100 (2019) research from the High Pay Centre and CIPD showed that there had only been a 13% fall in median pay for chief executives. However, 43 CEOs saw their pay increase and pension contributions were still worth an average of 25% of base salary.

Andrew Ninian, director of stewardship and corporate governance at the Investment Association (IA), says that although there is much still to be done, changes the IA has made combined with those in the latest Corporate Governance Code are having an impact.

“Pensions provide an excellent example. Last year, the revised Corporate Governance Code asked companies to align their executive pension rates with the workforce. This change was never going to be immediate – pension provisions are a contractual entitlement.

“However, in the last year we have seen the vast majority of companies appointing new directors, or those companies with a policy vote, commit to appointing any new executive directors on a pension contribution in line with the workforce. We have also seen a number of individual directors show leadership by voluntarily reducing their pension contributions, such as those at HSBC, Centrica, RSA and most recently at Standard Chartered. We expect this to continue through 2020,” says Ninian.

The IA has been encouraging remuneration committees to be clearer about the link between pay and performance, and to consider introducing simpler executive pay structures, particularly for long-term incentives.

The calls were made in the IA’s updated Principles of Remuneration and reiterated in a letter to the Chairs of FTSE 350 Remuneration Committees.

Long-term awards are a particularly difficult area, as there is no single answer to how best to incentivise executives. Investors of course want to invest in companies that deliver long-term returns, and ensuring that leaders’ awards support this aim is essential. 

“Each company is unique and each company should choose the pay structure it feels is appropriate to reach this end. However, what has become clear is that traditional long-term incentive schemes do not always work; even at times driving outcomes which concern shareholders, such as increased grant levels or volatile and significant vesting outcomes,” explains Ninian.

“Investors are willing to consider alternative structures, such as a restricted shares scheme or deferred bonuses or share awards, as long as they are simple, understandable and most importantly align with the company’s strategy.”

Beyond looking at the structure of long-term incentives, calls for greater pay transparency and restraint for those at the top of organisations is unlikely to subside.

As Ninian points out, “the future of executive pay will have to strike the correct balance between being an effective tool for the retention and motivation of the very best talent at UK plc, pay for performance, and fairness”.

Part of this balance includes ensuring that remuneration plans are flexible enough to adapt to changes; be it organisational, sectorial or even broader global and economic changes.

“Flexibility was a key component of our principles of remuneration, whether as part of alternative structures or through the increased adoption of discretion.

“Remuneration committees will have to continue to demonstrate how they have ensured there is a strong link between pay and performance, and the decisions and discretion they have used to achieve this link,” concludes Ninian.

The author is Dawn Lewis, content editor at REBA.