As the dust settles on yet another eventful AGM season, a report by The Investment Association — the leading trade association for trust and fund managers in the UK — has sought to address the problems that have led to a growing disconnect between companies and their shareholders over the amounts paid to top executives. Certainly, the 2016 AGM season will be remembered for publicised spats over pay. Indeed, such was the media scrutiny on remuneration practices at FTSE-listed firms that Theresa May, the new UK prime minister, sought fit to promise a curb on boardroom excesses, which included making all remuneration votes binding in nature.

The thrust of the final report, put together by a working group following consultation with 360 investors, asset owners and company employees, appears to be the realignment of executive pay by affording companies’ greater flexibility in crafting incentive structures, thus allowing for more effective remuneration arrangements which will serve to “rebuild trust” in pay for performance at UK issuers. In attempting to achieve these aims, the investment association has concluded that the current “one size fits all” approach to pay, which has led to many incentive structures appearing indiscernible from one another, simply cannot be effective for all companies.

The report takes particular aim at the current long-term incentive plan (“LTIP”) model seen at the vast majority of UK issuers, which the working group states has led to growing complexity in incentive arrangements, as well as leading to unjustifiably high pay, without ensuring the requisite alignment with shareholders. The report also appears to register thinly veiled criticisms of placing “further conditionality” such as clawback malus and holding periods on awards, as they lead to “participants significantly discounting the remuneration they are awarded and has often led to increases in levels of remuneration.”

While the recommendations of the working group — of which there are ten — do not go as far as Ms. May in recommending that annual votes on remuneration become legally binding in nature, one area of overlap is the potential requirement to publish the ratio of CEO to median employee pay, an approach taken by the SEC in the US. This particular recommendation has certainly had its critics in the US, but the idea of a pay ratio may well gain traction over the coming months in the UK; indeed, media headlines today have focused on the yawning gap between CEO and median employee pay, which has now reportedly climbed to greater than 140:1 for the constituents of the FTSE 100. The remaining recommendations surround the strengthening of remuneration committees, which should be more accountable to shareholders; increasing transparency on the setting of targets, not just disclosing the targets themselves; and guarding against potentially excessive increases that are based on the advice of consultants or benchmarking exercises.

It’s unclear whether the recommendations and the overall report will result in a sea-change in the approach to executive pay in the UK, particularly as the homogeneity of UK pay structures may well be the result of previous investor pressure. Nonetheless, there are a growing number of voices warning of the impact distrust in business will have on corporate governance: PwC has published a report entitled “Time to Listen”, warning that the failure to address the “toxic” environment for executive pay will result in politicians and regulators stepping in, while in the U.S. a group of leading executives have framed a set of “common sense” governance principles for companies to follow.

With the majority of FTSE 350 issuers preparing to resubmit their binding remuneration policies for a triennial shareholder vote next year, it will be interesting to see how these views – and particularly the specific criticism of common UK structural features such as LTI awards and clawback/deferral – are received by remuneration committees. Given that the prevalence of these features, as well as the LTIP model overall, appears to have been driven by investors themselves, boards may be placed in the difficult position of balancing the views of some shareholders, who believe that excesses can be mitigated through structural safeguards, against others seeking more sweeping changes. It should be an interesting period of engagement in advance of the 2017 proxy season.