Home > Compensation > The UK Investment Association`s Compensation Principles

The UK Investment Association`s Compensation Principles

The Investment Association published in November 2015 its Compensation Principles, which it expects to guide how remuneration is established and structured in the UK. (1)

The guidance is structured in (i) Principles, (ii) Recommendations to Compensation Committees, -CC from now on- (General, Fixed and Variable Pay).

The Principles refer to the role different constituencies:

  1. Shareholders: remuneration practices need to pursue shareholders` interest and sustainable value creation, which is in line with Institutional Investors` fiduciary duty to final investors, whose capital must be correctly allocated, and once allocated, correctly managed.
  2. Board of Directors: non executive directors and mainly those belonging to the CC must oversee the executive remuneration policies, in connection with the fiduciary duty to act in the interest of shareholders and to pursue long-term objectives connected with other stakeholders also.
  3. Compensation Committee: the CC needs to ensure that internal and external equity, alignment with strategy and agreed risk appetite, and firm performance base executive remuneration.

Among the Principles, the guidance also refers to the Remuneration Policies:

  1. Value creation and corporate strategy need to be promoted by them.
  2. Performance and sustainable financial health in the best interest of all funds providers needs to be enhanced by compensation decisions.
  3. Remuneration needs to contemplate the company`s financials and no undeserved pay should to be obtained,

and Remuneration Structures: some adjectives to be adopted, like: simple, efficient, long-term focused, balanced between fixed and variable, easy to correct –malus and clawback-, commitment enhancing and not dilutive.

The Recommendations relate to:

  1. General Considerations: the guidance recommends (i) to avoid paying more than necessary or in dissonance with the company`s performance and financial situation; (ii) to require executives to keep high (not hedged nor pledged) shareholdings, only vested and not conditioned shares to be counted; (iii) to include ex-post performance adjustment measures; (iv) to use discretion in the interest of shareholders; (v) not to increase costs to ease executives`tax obligations, and to keep internal equity; (vi) not to pay for failure nor in excess of the necessary in the recruitment phase, nor in the case of special events.
  2. Fixed pay: (i) Role and responsibility, not medians, to determine base pay; (ii) pension schemes to be connected to those established for the general workforce; (iii) full disclosure of benefits and exclusion of allowances as a part of fixed pay.
  3. Variable pay: to be discussed soon in a new post.

 

(1) The guidelines can be downloaded here, https://www.ivis.co.uk/media/11101/Principles-of-Remuneration-2015-Final.pdf, and are dated 11th November 2015.

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