Investment Association: The IA’s Principles of Remuneration 2025

On 9 October 2024, the Investment Association (IA) published its updated Principles of Remuneration (Principles). These were last published in November 2022 and have been updated to reflect evolving market practice, as well as simplified.

In the Foreword to the Principles, the IA stresses that they are guidelines rather than rules, and their purpose is to foster good practice, achieve alignment with investor expectations and support a competitive market environment. They should also be read alongside the UK Corporate Governance Code since they build on remuneration expectations there.

Companies are encouraged to adopt the remuneration structure most appropriate for their business, corporate strategy and performance, and to explain how this aligns with the long-term interests of the company and its shareholders. Since investors will analyse the suitability of remuneration proposals on a case-by-case basis, it is crucial for remuneration committees to engage with their major shareholders to understand their views and provide clear explanations why the remuneration policy and approach is right for their business, company strategy and shareholders.

Overarching principles

The Principles set out three overarching principles as follows:

• Remuneration policies should promote long-term value creation through transparent alignment with the board’s agreed corporate strategy.
• Remuneration policies should support individual and corporate performance, encourage the sustainable long-term financial health of the business and promote sound risk management for the benefit of material stakeholders.
• Remuneration policies should seek to deliver remuneration levels which are clearly linked to company performance.

The Principles state that these can best be met by remuneration committees considering the factors set out in the Principles, collaborating with shareholders and demonstrating alignment between remuneration and value creation and protection.

Key changes from the 2022 Principles

These include the following:

• Guidance for remuneration committees - this section includes an Introduction clarifying the purpose of that guidance and there is new guidance on shareholder consultation for remuneration committees to consider. This points out that the purpose of that consultation is not to seek approval or endorsement, but to understand shareholders’ views and expectations which the company can consider in designing and implementing its remuneration policy.

• Level of remuneration – among other things, the Principles state that if the company is deriving significant revenues from particular markets such as the US or is competing for talent globally, the remuneration committee should set out the impact of attracting global talent on the positioning of remuneration. In addition, the Principles state that the use of benchmarking on its own to justify remuneration increases is not appropriate. If benchmarking is used, then the identity and constituents should be disclosed, with an explanation of why their selection is appropriate.

• Annual bonus – while there is no longer a stated expectation for deferral of the entire bonus into shares for bonus opportunity of greater than 100% of salary, shareholders continue to expect to see a bonus deferral policy which is aligned with the risk profile and time horizon of the business. However, if an executive director has met the required shareholding ownership guideline, shareholders may support a reduction in the level of deferral for the relevant director, provided that the remuneration committee still has sufficient ability to exercise malus and clawback provisions.

• Long-term incentives and hybrid schemes – the Principles include a short section on hybrid schemes (eg a combination of performance shares and restricted shares), noting that these are sometimes used by companies that have a significant US footprint and/or compete for global talent. The Principles note that where hybrid schemes are used, they should follow the same guidance as applies in the Principles to performance share plans or restricted share plans and the restricted share plan portion of the hybrid scheme should be discounted to reflect the lower risk and higher certainty involved. The remuneration committee should also explain the rationale and methodology for determining the discount rate, and the vesting period for a hybrid scheme should be at least five years, with no accelerated vesting or early release of shares, subject to a clear explanation of any different approach. For restricted share plans, while in terms of award size, shareholders still expect a significant reduction, typically a discount of 50%, depending on the company's circumstances and the performance measures used in the previous plan a different discount rate may be considered appropriated.

• Share dilution limits for long-term incentives - the restriction for ‘discretionary’ incentives (previously limited to 5% of share capital over 10 years) has been removed and while the number of new shares issued, or treasury shares re-issued under all the company's share schemes should still not exceed 10% of the issued ordinary share capital (adjusted for share issuance and cancellation) in any rolling 10-year period, the Principles recognise that there may be exceptional cases where higher dilution limits may be sought. This may be the case with recently listed high growth companies and in such cases, when seeking shareholder approval, the remuneration committee should disclose the rationale and expected timeline for aligning with standard dilution limits.

• Malus and clawback - the guidance around malus and clawback has been expanded to be consistent with that in the updated 2024 UK Corporate Governance Code.

• Shareholding guidelines – the Principles state that shareholders generally consider the long-term incentive grant size as a suitable benchmark for the minimum shareholding requirement.

(Investment Association, The IA’s Principles of Remuneration 2025, 09.10.2024)

Parliament: Draft regulations –The Reporting on Payment Practices and Performance (Amendment) (No 2) Regulations 2024

A revised draft of the Reporting on Payment Practices and Performance (Amendment) (No 2) Regulations 2024 were published on 7 October 2024, together with a draft Explanatory Memorandum.

These draft Regulations are in the same form as a version previously published in May 2024, and they amend the Reporting on Payment Practices and Performance Regulations 2017 (Principal Regulations) and the Limited Liability Partnerships (Reporting on Payment Practices and Performance) Regulations 2017 (LLP Regulations), which impose a requirement on large companies (“qualifying companies”) and qualifying limited liability partnerships (LLPs) to publish certain information twice per financial year about their practices, policies and performance in relation to paying suppliers.

These draft Regulations introduce requirements for qualifying companies and LLPs to publish certain information on practices, policies and performance with respect to retention clauses in any qualifying construction contracts with suppliers.

Such qualifying companies and LLPs will be required to report on standard terms for holding monies in retention in qualifying construction contracts. This will include a statement as to whether the company’s payment practices and policies include or do not include retention clauses. Where a company makes a statement that retention clauses are included, further information about those clauses and the company’s retention practice will be required, together with certain retention payment performance data for qualifying construction contracts in the reporting period.

The draft regulations are now expected to come into force on 1 January 2025 and require additional information to be reported by qualifying companies and LLPs for financial years beginning on or after 1 April 2025.

In addition, on 7 October 2024, in a Written Statement to Parliament, the Government announced that it will lay secondary legislation in this parliamentary session to make it a requirement for large companies to include information about their payment performance in their Annual Reports. The Department for Business and Trade will also launch a public consultation within the next few months on additional legislative measures to address late payments and long payment terms.

(Parliament: Draft regulations – The Reporting on Payment Practices and Performance (Amendment) (No 2) Regulations 2024, 07.10.2024 and draft Explanatory Memorandum)