WTW focuses on the changes related to executive compensation and Board diversity in response to the updated Institutional Shareholder Services (ISS) guidance.
Institutional Shareholder Services (ISS) has released updates to its voting guidelines for 2025, effective for shareholder meetings from 1 February 2025 onwards. In the following summary, WTW focuses on the changes related to executive compensation and Board diversity. You can read more in the official publication from ISS.
There are no changes relating to remuneration for the Continental Europe policy.
The proposed changes for the United Kingdom (UK) and Ireland policy are somewhat more significant, taking into account the debate on pay competitiveness and the recent update of the Investment Association ('IA') Principles of Remuneration. The main changes are as follows:
Executive Compensation
- Following the lead of the IA's Principles of Remuneration, ISS discourages companies to use market benchmarking as the main reason to justify increases in remuneration and companies need to explain the rationale for salary decisions "based on the talent markets they are recruiting from".
- According to ISS, "long-term incentives should be appropriate for a company's individual circumstances, support the company's strategic objectives, and take into account the remuneration structures of the wider workforce". Although they have not explicitly mentioned 'hybrid' long-term incentive arrangements (i.e. those combining performance and restricted shares), we understand that ISS's position offers guarded support for such arrangements if the company can put forward a compelling case for their adoption.
- Similarly to the updated IA Principles, ISS has removed the 5% dilution limit in any rolling ten-year period for new or amended executive discretionary share schemes, retaining only the 10% in ten years limit for all share plans. However, they have emphasised that the 5% dilution limit remains good market practice by many investors and so any companies going beyond this level should explain why this is appropriate.
- In alignment with the updated UK Corporate Governance Code, ISS has emphasised that "the circumstances and period in which malus and clawback could be used, and details on whether such provisions were used in the reporting period, are expected to be disclosed in the annual report on remuneration".
- UK Remuneration at Financial Institutions – Capital Requirements Directive (CRD) V: The entire section has been removed, removing the cap on bank bonus arrangements.
Board Diversity
The main change in relation to Board Diversity is to clarify that the Financial Conduct Authority (FCA) requirement is for companies to report against targets, as opposed to actually meeting them. However, ISS note that investors do also expect progress against the targets.
WTW's point of view
ISS have acknowledged the debate on pay competitiveness and the recently updated IA Principles. ISS emphasizes that each company has its own specific circumstances, and executive compensation should be reviewed on a case-by-case basis, provided there is clear disclosure and a rationale supporting shareholder interests and value creation.
However, ISS have taken a somewhat more conservative position and they have, for example, been less explicit than the IA in their support for the introduction of hybrid long-term incentive arrangements. The ISS update does not reflect the potential flexibility discussed in the IA Principles for the level of bonus deferral to be reduced where shareholding guideline levels have been met – though we understand that their position is that this may be considered acceptable as long as other shareholder alignment features are sufficient.
The debate on pay competitiveness will surely continue in 2025 and we anticipate that another round of companies will follow those which made bold moves on executive pay in 2024. The responses of the proxy agencies to this changing landscape will continue to evolve. WTW will keep you up to date with developments as they occur.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
