UK executive compensation roundup

The Employment Rights Act 2025

The UK’s Employment Rights Act 2025 (ERA) represents one of the most consequential reforms in UK employment law for many years. Royal Assent is expected to take place on December 18, 2025 and key measures will be rolled out from April 2026 through 2027.

Many provisions will require detailed secondary legislation and guidance before they take effect. The government has committed to extensive consultations throughout 2026 on key areas such as “fire and rehire” restrictions, collective redundancy thresholds, zero-hours reforms, flexible working rules, family leave protections, and trade union access rights. These consultations will shape the practical application of the ERA, including definitions, procedural requirements and enforcement mechanisms.

The most significant change that will be introduced by the ERA will be reducing the period before an employee can bring a claim for statutory unfair dismissal from two years to six months after commencement of employment. This period represents a change by the government which originally proposed that unfair dismissal should be a “day-one” right. This reform, which is expected to come into effect in January 2027, coupled with the proposed removal of the compensation cap for unfair dismissal (currently limited to the lower of 52 weeks’ gross pay and £118,223) marks a substantial change in the balance of employment protections and will greatly increase potential employer exposure to claims. Dismissals after the first six months will require careful handling, robust documentation and adherence to fair procedures.

The tables at the end of this update provide an overview of the main provisions of the ERA, their impact on employers and when they are intended to become effective, in addition to other notable developments in employment law.

Government consultation paper: Non-compete clauses

Government consultation on statutory limits for non-compete clauses

The UK government has published a working paper seeking views on reforming post‑termination non‑compete clauses in employment contracts. This follows the previous government’s 2023 response (to a 2020 consultation) which indicated its support for a three-month statutory cap on duration. The consultation closes on February 18, 2026 and there is currently no indication of timing with regard to any resulting legislation.

Key proposals under consideration

As acknowledged in the working paper, non-competes are only enforceable to the extent that they protect legitimate business interests and this principle would not change if the government decides to implement any of its proposals. Those proposals are listed below:

• Introducing a cap on the maximum duration of non-competes, potentially shorter or longer than the previous government’s suggestion of a three-month period.
• A tiered approach based on employer size:
  • employers with 250+ employees: a three-month cap;
  • smaller employers: up to six months.
• A salary threshold, so that non‑competes could only apply to employees earning above a specified level.
• A hybrid approach combining duration limits with salary thresholds to target restrictions more proportionately.
• A ban on all non-competes.

Policy rationale

The government cites evidence that non‑competes are widely used, including for lower‑paid roles, and may restrict labour mobility, innovation and productivity. Any changes made as a result of the consultation will aim to balance legitimate business interests with freedom of movement for employees.

Implications for employers

If any restrictions on non-competes are likely to be introduced, then employers should consider strengthening alternative protections such as non‑solicitation, non-dealing and confidentiality provisions.

UK government’s budget

The UK government’s budget on November 26, 2025 introduced several measures that directly impact executive compensation and employee benefits. The key changes will take effect in 2026 and in future years.

Tax and incentive arrangements

• Enterprise Management Incentives

  An Enterprise Management Incentive (EMI) scheme is a share option plan that allows qualifying companies to grant tax-advantaged share options to employees. From April 6, 2026, the limits on EMI eligibility will increase considerably. For companies, the limits on both the maximum number of employees and the aggregate value of share options will double, increasing to 500 employees and £6 million in options respectively. In addition, the gross assets limit for qualifying companies will increase fourfold to £120 million. Separately, the permitted exercise period for EMI options will extend from 10 years to 15 years for both existing and new EMI options. These changes will potentially broaden access to EMI options for senior hires.

  Currently, companies operating an EMI scheme are required to notify HMRC of any share option grants within a certain time limit in order for the options to qualify for tax-advantaged treatment.  However, from April 6, 2027, this notification requirement will be removed, simplifying EMI compliance requirements.

• PISCES for EMI and CSOPs

  The Private Intermittent Securities and Capital Exchange System (PISCES) is a new intermittent trading venue developed by HM Treasury, the Financial Conduct Authority, the London Stock Exchange, and other market participants. Introduced in June 2025, PISCES functions as a regulated marketplace that enables existing shareholders of private companies to exchange their equity holdings periodically within a structured framework.

  Both EMI and CSOP (Company Share Option Plan) options are UK tax-advantaged share options and substantial changes to their terms, such as introducing additional exercise triggers, usually results in a loss of those tax advantages. However, the government will allow existing EMI and CSOP options to include a PISCES trading event as an exercisable event without the loss of the tax advantages. This will be applicable to options granted before April 6, 2028, with retrospective effect from May 15, 2025, thereby potentially improving liquidity planning for option holders.

Pensions and salary sacrifice

From April 6, 2029, employee pension contributions made through salary sacrifice that exceed £2,000 annually will become subject to both employee and employer National Insurance contributions (NICs), whilst employer contributions will remain free of NICs. This measure limits the NICs advantage of substantial salary sacrifice arrangements, often used in pension planning.

Corporate governance

Proxy advisor updates

The proxy advisors, Institutional Shareholder Services (ISS) and Glass Lewis, two of the most influential proxy advisors for UK corporate governance voting recommendations, have recently announced that they are adapting their strategies towards UK remuneration and incentive plans. Having long relied on prescriptive year‑end policy guides, which have been heavily criticised as “box‑ticking” in the past, both firms are shifting to a more bespoke, case‑by‑case approach.

• ISS 2026 policies - ISS plans to expand its pay‑for‑performance analysis from a three‑year to a five‑year window and has indicated greater flexibility towards longer-horizon, time-based equity awards, such as five-year restricted stock units.

  The updated UK guidelines for 2026 also require companies to provide more transparent explanations for the treatment of departing directors who are classified as good leavers in line with best practice, including: disclosure of the nature and value of exit arrangements; how the individual meets the “good leaver” criteria; and any ongoing vesting or post-termination benefits. This is to enable investors to assess whether such packages align with performance outcomes and shareholder value.

• Glass Lewis - Glass Lewis will cease issuing its “benchmark” or “house” voting policies in 2027, moving instead towards multiple bespoke policy perspectives aligned with client stewardship goals, enabled by AI and analytics. Glass Lewis’ revised proprietary pay‑for‑performance model will extend evaluation to five years, introduce more quantitative testing and refine alignment assessments through a holistic review of the company’s remuneration structure, disclosure and practices. Roll‑out is anticipated for the 2026 proxy season.

  Additional updates to its proxy voting polices for 2026 include that Glass Lewis will typically recommend against the re-election of the audit or remuneration committee chair where the committee is deemed insufficient in size, rather than advising shareholders to abstain. It will also recommend against the re-election of the nomination committee chair where the board does not comprise of at least 40% gender diverse directors.

These changes indicate a departure from uniform policies towards more flexible, company-specific assessments, with a particular focus on incentives and remuneration plans.

Investment Association guidance

Reflecting a broader theme of tailored governance, the Investment Association (IA), which represents members of the UK investment management community, has opted not to issue its customary annual Principles of Remuneration guidance this year. This is because feedback from investors and companies indicates that the existing guidance remains effective, reducing the need for significant updates or a full set of revised Principles. However, it has continued its tradition of issuing a short letter to FTSE 350 remuneration committee chairs outlining investor expectations for the upcoming 2026 AGM season. This year’s messaging emphasised:

• the need for company‑specific rationale for proposed changes to pay structures or quantum, avoiding boilerplate explanations such as “competitiveness” or “retention”. Investors want to know why the approach fits the company’s strategy, circumstances and how it supports future success;
• robust use of benchmarking, with clear justification on peer selection, relevance, and structure;
• companies should be cautious introducing hybrid long-term incentive plans (i.e., structures combining performance shares and restricted shares) due to the potential weakening of the link between pay and performance. The IA expects companies to provide clear, company-specific rationale explaining why a hybrid model suits the business strategy and for early shareholder consultation before implementation;
• maintenance of bonus deferral and shareholding requirements to support malus and clawback. While proportionate reductions in deferral may be acceptable once shareholding guidelines are met, complete removal of deferral is not considered appropriate;
• changes to in-flight awards should only occur in exceptional circumstances and need to be clearly justified, subject to consultation and supported by shareholders; and
• improving the shareholder consultation process:
  • the IA will create a directory of IA member contacts for remuneration consultations; and
  • the IA will seek to re-establish collective meetings on remuneration proposals.

Upcoming employment law changes

The following tables provide an overview of the main provisions of the ERA, their impact on employers and when they are intended to become effective, in addition to other notable developments in employment law.

Employment Rights Act 2025

Other developments