Executive reward governance update 

The Investment Association (IA) published its annual letter to remuneration committee chairs and advisors outlining how it will apply its Principles of Remuneration for 2026. Having substantially rewritten the Principles for 2025, there will be no changes for next year. However, having now seen how companies have responded to the new Principles, this year’s letter highlights the areas currently on the minds of its members, and sets out the IA’s approach to reviewing remuneration proposals in 2026.

The IA reiterates the point made last year that the Principles are not rules and that it will evaluate each company’s proposals on a case-by-case basis.

This will require thoughtful engagement from remuneration committees, with clear disclosures and well-substantiated rationales for any changes.  The IA and its members are concerned, however, that too many remuneration committees rely on boilerplate and generic justifications.

If a remuneration committee is pursuing material changes, the IA expects high quality explanations to be provided, with specific narrative about why a particular approach has been chosen and is the best approach for the company.

IA members have for many years considered that benchmarking alone is not sufficient to justify increases in remuneration, as this can lead to a ratchet effect in the market. 

There is a perception that benchmarking is too often relied upon as the only justification for increases in remuneration. Where benchmarking is cited to justify changes, there should be a detailed explanation as to why and how peer groups have been chosen and how remuneration compares to these. 

Where significant catch-ups are deemed appropriate the company should also explain how this is in shareholders’ interests, in particular how they will result in a strong link between pay and performance.

Whilst the Principles in 2025 explicitly introduced flexibility to consider alternative structures to conventional performance shares, they generally remain cautious about the use of hybrid schemes. If seeking approval for a hybrid scheme, it is expected that the company has a significant US footprint and/or genuinely competes for global talent at Board level.

The Principles offer flexibility in the operation of deferral of the annual bonus, once shareholding guidelines have been met. However, investors are not comfortable with proposals that deferral should be completely removed as it still offers an important mechanism to operate malus and clawback provisions.

The Principles state that if an award was granted with certain performance criteria, it is best practice for them to remain in place for the life of that award. To the extent that the outcomes do not represent an appropriate outcome, discretion can be used; however, discretion should only be used in exceptional circumstances, must be clearly justified and the company should consult to make sure it has the support of shareholders.

The IA continues to expect remuneration committees to consult on material changes, and to seek engagement early in the process. 

The IA plans to create a directory of IA member contacts so that companies are able to reach appropriate contacts within their shareholders.

It will also seek to re-establish collective meetings on remuneration proposals so that a wider group of shareholders can engage in consultations.

Many shareholders are interested in how remuneration committees are balancing rewarding executives for their performance with the outcomes for other stakeholders, including the wider workforce and customers.

Committees, particularly those at mass market consumer-facing companies or those with a significant proportion of low paid employees, should therefore continue to provide detailed explanations of how these factors are considered and what impact this has had on remuneration decisions.

The themes addressed in the IA’s letter for 2026 are in general not surprising. On the issue of hybrid schemes, it was clear in some of the 2025 votes that shareholders are generally not in favour of hybrid schemes, and that clear and very substantial US or global exposure is needed for these schemes to gain a high level of support. 

The letter re-emphasises wider workforce issues, which had begun to receive less investor attention since COVID-related furloughing and the subsequent cost-of-living crisis. This may be a particular focus area for companies with high numbers of low paid workers. Companies that are making significant redundancies may also see executive variable pay outcomes come under scrutiny.

Collective consultation meetings are already common in Scandinavia and if these are introduced in the UK it may result in a shift in the power dynamic when companies seek to engage on remuneration. Remuneration committee chairs may need to be better prepared, and investors will need to engage thoughtfully. It is in no one’s interest for the engagement process to become adversarial.