The Governance Mechanisms

Remuneration Committees

Remuneration committees are now the primary mechanism by which senior pay awards are determined in the UK

The widespread use of remuneration committees in the UK has lagged that in the US, where the use of such committees have a much longer history

The use of remuneration committees among FTSE firms has increased dramatically over the last decade (Conyon 1997)

While substantially less than two thirds of firms had formed such a committee in 1988, the number is now close to 100%

In the past, remuneration committees were less common in smaller firms but even amongst these firms the take-up rate is now about 80%

Much of this increase has been driven by the publication of the Cadbury and Greenbury Codes of Best Practice

By 1995, the typical UK remuneration committee consisted of about 4 members

Best practice guidelines recommend that remuneration committees should consist wholly of non-executive directors. In particular, it is recommendation that the CEO plays no part in determining his/her own compensation

While most firms have now formed remuneration committees, committee composition still remains variable

Generally, the percentage of non-executive committee members has increased over time (up from an average of 68% in 1991 to 91% in 1994)

In large firms, committees typically consist solely of non-executive directors

However, in medium and smaller firms it is still common for the CEO (and sometimes other executive board members) to sit on the committee

Despite widespread calls for the formation of such committees, it remains unclear whether they act to constrain executive pay levels and/or tie pay more closely to firm performance

Conyon (1997) reports that firms with a remuneration committee experienced lower rates of growth in executive pay over the period 1988-93

In contrast, several studies report that CEO pay levels are actually higher in the presence of a remuneration committee (Conyon & Peck 1998 for the UK; Main & Johnstone 1993 for the US)

However, Conyon & Peck (1998) report evidence of a composition effect: a higher proportion of non-executive committee members is associated with a stronger link between cash compensation and firm performance

Splitting The Roles Of The Chairman & CEO

Most UK companies (about 80%) separate the roles of chairman and CEO

The Cadbury and Greenbury Codes recommended separation of the roles of chairman and CEO to ensure that no single individual dominates the board

Even before Cadbury and Greenbury, relatively few UK firms combined these roles

The UK experience contrasts with that of the US where combination of the two roles is the norm

In the US, the failure to separate the roles of chairman and CEO has been linked to higher cash and total compensation

This may be due to the added responsibility and ability of the CEO

Or it may reflect the CEO’s greater influence over the board and the remuneration committee

In contrast, there is little evidence that this aspect of board structure makes any significant difference to the cash compensation received by UK executives

Conyon & Peck (1998) find no evidence of higher pay in firms where the roles of chairman and CEO are combined in the same individual

In addition, they find no evidence that the pay-performance sensitivity is any weaker in such firms

Similarly, Conyon (1997) finds no evidence that separating these roles plays any part in shaping executives cash compensation

However, since existing UK studies fail to include the share options and LTIPs in their measures of executive compensation, it remains an open question whether total pay levels are affected

Key Reference

Conyon & Peck (1998) Board control, remuneration committees and top management compensation, Academy of Management Journal Vol. 41(2): 146-157

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Last Updated: 10 July 2017