The Investment Association has published its annual letter to Remuneration Committee chairs and updated Principles of Remuneration (“Principles”) for the next AGM season. Most of the changes reflect the new UK Corporate Governance Code and the Investment Association (“IA”) has updated the Principles to make them “clearer and sharper”.

That certainly describes the tone taken in the annual letter. The IA makes it clear that companies which fail to respond to shareholder views, or do not take the time to understand those views, will find investors have no choice but to vote against their remuneration proposals. Reflecting the hardening mood on director pay, the IA warns that executive remuneration is a reputational issue for the company, individual Remco members and those executive directors who receive remuneration from contentious arrangements. Any boards still taking the view that pay is a contractual matter only and that fairness in remuneration is a woolly, nice to have, concept have been given a very clear warning that the landscape has changed.

These priorities are clear in the IA’s key issues for the 2019 AGM season, which include:

• Encouraging companies to report their CEO pay ratio in 2019 (even though the new requirements apply from 2020 for most companies), and to adopt Option A as this is the most statistically robust calculation method.

• Highlighting that engagement between Remuneration Committees and investorsremains key, although some IA members have found Remuneration Committees are “overly considerate” of the management perspective and so do not give sufficient weight to the views of investors.

• Making clear that shareholder consultations should be a genuine process of obtaining shareholder views on a company’s complete remuneration structure (not just proposed changes) and not a validation exercise.

• Reiterating that “ordinary pension savers” want to understand why investors support remuneration pay-outs, and so investors must be able to link pay and performance through transparency on financial and non-financial targets in order to justify their support.

The key changes to the Principles mostly reflect the new UK Corporate Governance Code. In summary:

Malus and clawback: the IA notes that the two most common triggers (gross misconduct and misstatement of results) rarely apply and so it is often difficult for malus and clawback provisions to have a real impact. To deal with this, the Principles include a new requirement for Remuneration Committees to determine appropriate trigger events for their company and disclose those to investors. The Principles also include a new section setting out the process companies should follow to ensure they are able to enforce these provisions.

Shareholding requirements and post-employment holding periods: The Principles encourage executive directors to purchase shares using their own funds, and require Remuneration Committees set a minimum shareholding requirement and the time period within which it must be achieved. The Principles also clarify which shares may count towards the shareholding requirement.

Many companies are grappling with the new requirement for directors to hold shares following the end of their employment. The Principles set out the IA’s expectations on this, with perhaps the most significant being that it must apply to all new and existing executive directors as soon as possible and no later than the next policy vote.

Pensions: All future pension contributions must be at a rate which applies to the majority of the workforce. For new executive directors or those who change roles this rate should apply on appointment and the pension contributions of current executive directors should be reduced over time, without any compensation for that reduction.

Restricted Shares: As before, investors are willing to consider restricted share schemes but their support will be dependent on the strategic rationale for the scheme.

The IA’s approach underlines broader corporate governance changes that require companies to take into account the impact of their decisions on stakeholders, including employees, rather than solely on shareholders. This is a significant change to the way boards, and remuneration committees, operate and perhaps the 2019 AGM season will be an opportunity for companies to test their responses in advance of the new UK Corporate Governance Code taking effect.