Glass Lewis and ISS respond to the Investment Association's Principles of Remuneration 2025

Glass Lewis and ISS have announced changes (or proposed changes in the case of ISS) to their voting policies following the recent publication of the Investment Association 2025 Principles of Remuneration (the "IA Principles"). For smaller companies, Glass Lewis and ISS have announced changes which take account of the most recently published updates to the QCA Corporate Governance Code (the "QCA Code").

The changes on remuneration in Glass Lewis' 2025 UK Benchmark Policy Guidelines (the "GL Guidelines") closely echo those in the recently published IA Principles.

Institutional Shareholder Services ("ISS") has also published its proposed ISS Benchmark Policy Changes for 2025 (the "ISS Proposed Policy") which remain subject to the outcome of public consultation. If adopted in full, the proposed changes on remuneration would follow the changes to the IA Principles in most cases, despite divergence in areas like dilution limits.

Glass Lewis Guidelines

In line with the increased flexibility under the IA Principles, the updated GL Guidelines state that a holistic review of executive remuneration proposals will be conducted on a case-by-case basis when making voting recommendations, whilst emphasising the need for a clear link between executive pay levels and company strategy and performance and clear explanations for any departures from market norms.

The GL Guidelines have also been softened in several areas. For example, whilst Glass Lewis will still generally recommend against executive pension contribution rates that are greater than the rate available to the wider workforce, the GL Guidelines suggest that it may not do so if a sufficiently cogent explanation is given (although this would still require a statement of non-compliance with Provision 37 for companies which apply the UK Corporate Governance Code).

The GL Guidelines follow many of the changes in the IA Principles, for example:

• Dilution – Glass Lewis is comfortable with an increase in the dilution limit for discretionary share schemes from 5% to 10% of total issued share capital (or even higher for developing companies where there is a compelling rationale).
• Bonus deferral – Glass Lewis supports increased flexibility on the policy for bonus deferral where an executive director has met their shareholding guidelines.
• Hybrid plans – Glass Lewis have included a new section on hybrid plans. In line with the IA Principles, it expects that the following features will be disclosed: the rationale as to why a hybrid plan has been chosen, a reduction in the maximum opportunity compared to previous performance-based awards and how the discount rate was determined, and a total vesting and post-vesting holding period of at least 5 years. 

Notwithstanding the new guidance on hybrid plans, the GL Guidelines stress that Glass Lewis remains sceptical of "Combined Plans", where short and long-term incentives are combined into a single structure.

Other highlights are:

• Consultation process – regular and pre-emptive consultation with shareholders is encouraged. In particular, the GL Guidelines state that shareholders can reasonably expect companies to provide enhanced disclosure surrounding the consultation process, including the number of shareholders that were consulted and the resulting outcomes, the main feedback received from shareholders and how the company has responded to it.
• AIM companies – in line with the changes in the most recently published updates to the QCA Code, the GL Guidelines place an increased focus on encouraging AIM companies to put their remuneration reports, remuneration policies and employee share schemes to a shareholder vote.

ISS Proposed Policy

The ISS Proposed Policy also largely aligns with the IA Principles and the updates to the GL Guidelines (for example, there is a similar slight softening to the guidance on pension contribution rates for incumbent directors), but diverges in certain areas, for example:

• Dilution limits: while the ISS is proposing to soften its guidance on dilution limits slightly, unlike the Investment Association and Glass Lews, it is proposing to retain the "5% in 10 years" dilution limit for discretionary share plans. In its view, this limit is considered good market practice by many investors. Where companies are proposing to exceed either the 5% in 10 years limit for discretionary plans or the overall 10% in 10 years limit for all share plans, they will be expected to provide a clear rationale and explain why it is considered appropriate. That said, ISS has proposed removing the 5% limit for discretionary plans from the list of factors which would lead it to recommend voting against a resolution to approve a new discretionary plan.
• Bonus deferral and shareholding guidelines: ISS has not proposed any changes here, so will likely continue to view shareholding guidelines of at least 200 percent of salary and the deferral of a portion of annual bonus as best practice.
• Long-term incentive plans: rather than setting out specific guidance on hybrid plans, ISS is proposing to remove its negative view of choosing to operate multiple long-term incentive schemes. In line with the IA Principles, ISS's proposed changes indicate that it will focus on whether long-term incentive plans are appropriate for a company's individual circumstances, support its strategic objectives, and take into account the remuneration structures of the wider workforce.

Like Glass Lewis, the ISS Proposed Policy builds on the recommendations in the QCA Code and expands the list of criteria which would lead the ISS to consider recommending a vote against remuneration resolutions for companies which follow the QCA Code. For these companies, ISS now expect:

• long-term incentive awards to be subject to a performance or vesting period of at least three years;
• significant salary increases to be clearly explained;
• executive directors to be appointed under formal service contracts which provide for no more than 12 months' notice in the event of termination; and
• sufficient rationale to be provided when guaranteed and/or transaction-related bonuses are made to directors.

For more information about the updated IA Principles, see our recent blog post here.