The ongoing process to better align executive remuneration with the rest of the workforce

Towards the end of last year the Investment Association (IA) released its latest update on its Principles of Remuneration. The principles define IA’s members’ views both on how shareholders and directors should act when assessing executive remuneration, and on ways that remuneration packages should be structured.

The key changes are a further clampdown on executive pension perks – to bring them in line with the rest of the workforce – and the need to consider fairness both in relation to employees and society during the pandemic.

Clampdown on executive pension contributions

For some time the IA has been focusing on the need to curtail executives’ pensions contributions, which are often considerably higher than the wider workforce, to bring them in line with the majority of employees. The IA has now gone a step further and informed companies that its Institutional Voting Information Service will give a red top – its highest level of warning – to those companies that fail to draw up a credible action plan to align pension contributions by the end of 2022, if they are 15% of salary or more.

This move lowers the threshold from 25% of salary, and new executive directors are expected to have pension contributions that align to the rest of the workforce.

“Aligning executive directors’ pension contributions with the rest of the workforce is fundamentally an issue of fairness,” explains Andrew Ninian, director of stewardship and corporate governance at the IA. “Investors have already played an important role in bringing about change and this announcement will further increase the pressure on those companies that have yet to take action.”

The impact of Covid-19 on executive pay

Ultimately the aim of aligning executives’ pension contributions is to promote fairness and good employee relations, which is also the focus behind the IA’s response of the coronavirus pandemic.

In April, the IA launched guidance on Shareholder Expectations during the COVID-19 Pandemic. This was updated in November to reflect the latest thinking on how executive remuneration should be approached during this turbulent time. The overwhelming message from investors was one of caution, and that companies should treat their executives in line with the rest of the workforce and remain mindful of the pandemic’s impact on society.

The above guidance outlines that firms are expected to balance the need to incentivise executive performance, while reflecting the experience of investors, employees and other stakeholders. As such, investors have warned remuneration committees not to compensate executives for reduced pay as a result of the pandemic by adjusting next year’s remuneration, whether through ‘catch up’ awards or disproportionate salary increases.

In addition, investors also do not generally expect bonuses to be paid if a company has taken government or shareholder support – any company that chooses to do so is expected to provide a clear rationale.

“With coronavirus continuing to hit household finances across the UK, investors expect companies to treat their executive directors and workforce consistently when it comes to pay. Investors will be paying close attention to ensure pay remains linked to the experiences of shareholders, employees and other stakeholders,” warns Ninian.

Fairness in executive remuneration is likely to continue as an area of interest for the foreseeable future. With pay ratio reporting and the increasing focus on the introduction of environmental, governance and social metrics into executive incentive plans, it is clear that organisations will need to robustly justify the rationale behind their executive remuneration policies and decisions.

The author is Dawn Lewis, content editor at REBA.