There can be little argument with suggestions that the dynamics of the Remuneration Committee are crucial to ensuring a balanced approach on executive pay issues. Indeed there may be value for shareholders in an amendment to the UK Corporate Governance Code in relation to the diversity of the committee. Many of the worst-performing remuneration committees seem to be entirely comprised of CEOs or recent CEOs of other companies – which may prevent a sufficiently balanced view from being formed on remuneration issues.

Furthermore, the issues with the composition of the remuneration committee reflects poorly on the work of the board / nomination committees on the composition and diversity of the board. Diversity is more than just of gender – the board should be diverse in other respects including experience (not just experience of a specific sector, but more broadly of life experience). Given time, it may be that the new provision inserted in the UK Corporate Governance Code in relation to the diversity of the board may filter down to committee level also. It would be unfortunate however if diversity were to be viewed by boards solely as referring to diversity of gender or race.

Employee representatives on the Board of Directors are rare in the UK – FirstGroup being one of the few exceptions where employees have Board representation. However as an employee representative, he is not considered by FirstGroup to be an independent director and thus has not been appointed to the Remuneration Committee.

In Germany, Supervisory Boards have for many years included employees if the company meets criteria on size set by co-determination laws. German Remuneration Committees include some of these employee representatives on the Remuneration Committee. However Germany has not been immune to excessive executive remuneration.

Diversity on the remuneration committee may be part of the solution. But the question of  insufficient oversight by investors, especially those automatically voting with management, remains prominent. Here a successful application of the principles of the Stewardship Code may help matters.

An increased scrutiny by shareholders of remuneration consultants is clearly required. Requiring disclosure of tendering process of such consultants (perhaps in the UK Corporate Governance Code) may be more important than the disclosure of the fees they are paid – indeed some of the more sceptical investors may cite the upward ratcheting impact of the competition between remuneration advisors as an exception to the rule on the benefits of competition generally. Today’s announcement of the appointment of non-executive directors, one being a former fund manager, to the Remuneration Consultants Group suggests that the consultants realise they run the risk of having the finger of blame pointed at them, and are ensuring they have their responses ready. The true value of these appointments will be assessed when the Remuneration Consultants Group’s Code of Practice is published. An anodyne document would be a real disappointment.

Last Updated: 23 January 2011