THE INVESTMENT ASSOCIATION

It is hard to feel sorry for the Investment Association as a stalwart of the UK finance establishment. But truth told, they have a hard job setting out principles on UK top pay, because they sit at the crossroads between pure and socio-sensitive capitalist views. The first are classic red in tooth and claw free market believers, whereas the second recognise the contribution to value creation from various stakeholders, as delivered in various ways.

Earlier this month the long-awaited IA Principles of Remuneration 2025 was published. This followed the fallow year of 2024, which was used instead for extensive company consultation, and debate within the IA membership; both set against the backdrop of the London Stock Exchange “Big Tent” debate on top pay competitiveness in the UK.

Expectations ran high. Would the IA side with the free market hawks? Or with the doves and their nuanced view on context and stakeholders’ contribution to value creation?

And the upshot is? Well, a bit of both, which at first blush looks like a fudge. But rather adroitly, the Investment Association has done two things at once. Their 2025 guidance both liberalises, and adds to, the pay governance rules. Which makes it a dangerous read for those that read mainly that which they wish to see.

This comment is not a summary of the change items; for that a compliance and disclosures check list is a better bet.

Instead, we should recognise the mood music of institutional investors. On top pay it is mixed; and growing both stronger and more complex. The unifying heartbeat, however, is pay for performance structured correctly to drive the business aims, short, but better still long-term.

The Principles of Remuneration 2025 reflects this fully in both liberating and pay governance aspects. These factors matter strongly, and maybe disproportionally, depending upon the institutional investor asked to opine.

For example, liberating items include:

• Wording more flexible on requirements generally (with less pejorative wording too)

• Extensive invitations to invoke consultation and disclose the process and upshot.

• Bonus deferral into shares expectations muted when SOGs are met.

• Dropping the “Bad List” 20% vote against rule.

• Substituting appropriate dilution limits, for specified figures (hitherto sacrosanct territory)

While more pay governance items include:

• New pay comparator and rationale disclosure - which is an important item.

• A big focus on director joining salaries.

• Detailed guidance and disclosures for director leavers

• Expectations on the of use of discretion and exceptional items

The upshot is that:

• Companies must read this document as neither restrictive rules, nor consent.

• The IA guidance is generally safe ground for broadly acceptable proposals - it is guidance.

• And yet bespoke pay policy, proposals and reporting must all align with the business needs and be justified clearly.

• Setting pay structures and incentive design remain acute issues for listed companies.

• Engagement with institutional shareholders is essential and investors hold strong views, often inconsistent one to another.

The Compensation Committee’s job has become easier in some aspects; and more difficult in others. In short:

• Design pay to support the business with full granularity on both the chosen quantum and the incentive design; and

• To account fully for decisions on outcomes, joiner and leaver choices; and how to deal with adjustments and exceptions - all within the agreed compensation policy framework.

Executive compensation is moving from a compliance check-list issue to a core value creation commercial matter. That requires specific business centric design and operation. And this new business centric focus is very much welcome.

Executive Compensation and Incentive Design

Remuneration Advisory and Support

Please feel free to email or call:

Damian Carnell - [email protected] +44 (0) 7989 337118

VA Bec Bostock - [email protected]

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