The IA wrote to FTSE 350 Remuneration Committee Chairs yesterday to summarise the outcome of its annual review of its Principles of Remuneration. This year the review has taken place against a backdrop of the ongoing pandemic and, at the same time as updating its Principles, the IA has also issued updated guidance on shareholder expectations during the COVID-19 pandemic.
- The updated guidance on how to account for the impact of COVID-19 in remuneration decisions continues to emphasise the need to balance incentive outcomes for executives with the experience of shareholders, the wider workforce and other stakeholders. In particular:
- The IA does not expect companies that have participated in the government’s job retention scheme, raised capital or have otherwise relied upon direct external support to pay bonuses for FY2020 or FY2020/21, other than in “truly exceptional circumstances”;
- Remuneration Committees should disclose how the positive financial impact of other indirect government support such as business rate relief has been accounted for in remuneration outcomes;
- If a company has cancelled FY2019 or FY2019/20 dividends, this should be reflected through the operation of malus on deferred share awards or in FY2020 bonus outturns;
- In-flight bonus and LTIP targets should not be adjusted to take account of the impact of COVID-19. Remuneration Committee Chairs will be expected to confirm in their annual statement that no adjustments have been made. Where adjustments have been made, these should be fully disclosed and explained in the remuneration report. In addition, FY2021 variable pay opportunity should not be increased to compensate for lower remuneration in FY2020 due to the pandemic;
- Where a bonus is paid, consideration could be given to increasing the portion deferred in shares;
- Consideration should be given to reducing LTIP or restricted share grant levels to reflect the shareholder experience;
- Targets for future LTIP awards should be appropriately stretching. Where target ranges are lowered or widened, these should be at least as stretching in the circumstances as previous targets and a full justification should be given with reference to the target-setting process, internal budgets and broker forecasts;
- Remuneration Committees will be expected to exercise discretion to prevent inappropriate outcomes as and when awards vest, particularly where performance is not consistent with the shareholder experience or windfall gains have been created;
- The inability of a company to set meaningful LTIP targets during the pandemic is not by itself a reason to move to a restricted share model. Proposals to adopt restricted shares will continue to be assessed on their strategic rationale;
- Companies significantly impacted by the reaction to COVID-19 should consider whether it is an appropriate time to make changes to their remuneration policies as it may be more appropriate to wait until there is greater clarity on the future market environment.
In the letter to Committee Chairs, the IA has highlighted changes to the Principles in the following areas…