Ellason lens on… The Investment Association Principles of Remuneration for 2025

The Investment Association (‘IA’) published an update to its Principles of Remuneration (see here). The changes made reflect the evolving landscape of executive remuneration in the UK and give more room for companies to adopt a bespoke remuneration approach.

The IA has emphasised that the Principles are guidance, rather than a set of ‘rules that must be followed’, and encourages companies to adopt the remuneration structure most appropriate for their circumstances. There is a new emphasis on a freedom to diverge from the guidelines, permitting bespoke remuneration approaches, but only when a company is able to provide a comprehensive explanation for such divergence.

We summarise the main changes to the Principles below:

• Mandatory bonus deferral, now commonplace amongst FTSE companies, can be reduced if an executive has met the required share ownership guideline and a remuneration committee has sufficient ability to exercise malus and clawback provisions.
• Acknowledgement that ‘hybrid’ schemes, combining performance shares and restricted stock, may be relevant to companies that have ’a significant US footprint and/or compete for global talent’. However, there is a continued expectation that the restricted stock element should be discounted vs a performance share (to reflect the higher certainty), and for a remuneration committee to publish the rationale behind the discount, possibly implying that the generally-accepted 50% discount should not be automatically applied. The IA confirms the vesting period for a hybrid scheme is expected to be at least five years (unlike, for example, the annual vesting of restricted stock commonly observed overseas).
• The role of shareholder consultations has been clarified to state that such engagements are ‘not to seek approval or endorsement, but to understand the views and expectations of shareholders’, and an expectation that comprehensive disclosure is provided in the remuneration report around responses to feedback. The IA notes that consultations are ‘an opportunity to engage in open and transparent dialogue’, also recognising that the ‘inclusive’ approach will need to be reciprocated by shareholders.
• An increased emphasis on the disclosure of comparators if benchmarking is used to justify pay proposals, and an explanation as to why their selection is appropriate. A company is encouraged to ‘set out the impact of attracting global talent on the positioning of remuneration’ if it has a significant presence in an overseas market or is competing for talent globally.
• Share dilution limits have been somewhat relaxed with the removal of the restriction for ‘discretionary’ incentives (previously limited to 5% of share capital over 10 years) and a recognition that the overall dilution limit (10% over 10 years) could be higher in exceptional cases such as in high-growth companies.
• The guidance around malus and clawback has been expanded to be consistent with that in the updated 2024 UK Corporate Governance Code.
• A suitable benchmark for the level at which executive share ownership guidelines are set has been clarified as being the same as the long-term incentive grant size.

Ellason commentary: Our most recent conversation with the IA suggested that the updated Principles would be less prescriptive, and there is no doubt that this is the case. These Principles have been written to help ensure UK companies are able to compete in the global marketplace, with an emphasis that bespoke arrangements may be acceptable in the right circumstances. We applaud the IA and its members in revising their guidance and anticipate that many companies will consider how evolving attitudes to remuneration should impact their own remuneration policy renewals in the coming year.

Please do not hesitate to contact any of the Ellason team should you wish to discuss this issue further.