The Investment Association (IA) recently updated its Principles of Remuneration, which serve as a framework for determining executive pay. The goal is to create fair and transparent pay structures that are aligned with performance, ultimately benefiting shareholders in the long term. However, finding the right balance has been challenging, with criticisms of the guidelines being both too restrictive and too lenient.
One of the factors impacting executive pay has been the decline in the value of sterling following Brexit, which made UK pay less competitive in foreign currency terms. This has particularly affected foreign national executives whose pay became less attractive compared to their home markets. Additionally, the pay freeze during the pandemic further complicated matters, making it difficult to recruit and retain talent in key roles.
The issue of executive pay came to the forefront when Smith & Nephew lost its chief executive to the US in 2019, prompting other multinational companies like AstraZeneca to increase pay to retain top talent. In response to concerns about wealth disparity and large pay rises, the London Stock Exchange called for a discussion to address the consequences of limiting executive pay. Shareholders have also exerted pressure by voting against directors’ remuneration reports at AGMs.
When more than 20% of votes oppose these reports, companies are required to explain the reasons behind the result to shareholders. While some directors view this policy as unnecessary, it highlights the importance of engaging with shareholders to justify pay decisions. Shareholders also have the power to block a new pay policy from being adopted, ensuring that pay awards are within reasonable parameters.
The IA emphasizes that its principles are guidelines rather than strict rules, encouraging companies to stay within the guidance or justify any exceptions. However, challenges arise as fund managers increasingly rely on proxy voting agencies for advice, especially as non-traditional investors now own a significant portion of the UK stock market. These agencies may have differing guidelines and may criticize pay practices that align with IA principles.
Ultimately, the influence of the IA is crucial in navigating the complexities of executive pay. While pay pressures persist, it is essential for large investors to recognize the need for flexibility in certain circumstances. Striking a balance between fair executive pay and shareholder interests remains a continuous challenge that requires careful consideration and transparency.