The Executive Remuneration Working Group, supported by the UK’s Investment Association, has produced 10 recommendations aimed at regaining the public’s trust on executive pay, simplifying the pay structures of top company bosses and improving the alignment of their interests with those of their shareholders in its recently published final report.
Chair of the Executive Remuneration Working Group, Nigel Wilson, said,”I believe the 10 recommendations will help to simplify, provide greater transparency, and deliver better shareholder, company and executive alignment on pay. We need to restore public confidence in executive pay. Our report shows shareholders, Boards and executives agree the current approach is not working, and want constructive collaboration to get it right.”
The group’s recommendations follows consultation with stakeholders about the group’s interim report published in April and acknowledges the recent contribution to the debate by the UK’s new prime minister Theresa May on binding pay votes, and suggests an option to inform the debate could be to have binding votes on companies that have failed to receive support from 75% of shareholders on their previous year’s remuneration report.
The Report includes:
- A call for Boards to explain why they have chosen their company’s maximum pay level, with consideration of relativities such as the pay ratios between CEOs and different employees.
- A call for transparency around the target-setting employed in bonuses, including retrospective disclosure of performance ranges and provision of explanations where discretion has been used.
- A proposal that whole boards be required to engage in the remuneration-setting process, and for non-executive directors to have at least a year’s experience on a remuneration committee before being appointed as its Chair, plus clear disclosure of the rationale to be provided when discretion is used in awarding pay.
To move away from the current model dominated by long-term incentive plans, the report aims to rebuild trust by strengthening remuneration committees and their accountability, boosting shareholder engagement, making target-setting more transparent and giving companies discretion to explore how differing pay structures may gain market trust.
The Investment Association, which served as the secretariat to the group, said it would review its Principles of Remuneration to consider the recommendations.
Andrew Ninian, Director of Corporate Governance & Engagement at the Investment Association, said, “The recent intervention from our new Prime Minister shows that investors and companies need to work together and address the concerns with executive pay, our industry is clear that it expects UK listed companies to work with us to tackle the lack of trust that has resulted from the UK’s complex and ineffectual pay regimes.
“We will now look to amend our Principles of Remuneration so the asset managers who look after the financial interests of millions of savers and investors can play their part in delivering the change that is sorely needed.”Responding to the report the Financial Reporting Council’s chief executive, Stephen Haddrill, said, “”Corporate governance in the UK has a justifiably strong global reputation but this and confidence in business generally is being tarnished by the actions of those companies which are doing too little to recognise legitimate shareholder and public concerns on remuneration. Investors have a key role in holding companies to account and we therefore welcome this thoughtful report.”
The High Pay Centre, a think tank which campaigns against high executive pay and for less inequality between the very rich and others in the UK, suggested that the recommendations were largely obvious and the result would be ineffectual. The working group has not felt it has a role to advise on absolute levels of executive pay but the High Pay Centre said, “it is precisely the level of pay at the top which provokes public concern and casts business in a bad light. This is the popular sentiment which the new prime minister, Theresa May, has responded to.
“This report, good as far as it goes, must also be seen as another missed opportunity to have an explicit and unequivocal discussion about “quantum”. Without that, public concern will continue to grow, unease will persist, business and business leaders will remain banished to the dog-house, and not a single step in a healthier direction will have been taken.”