Archive for August, 2016|Monthly archive page
In my June blog piece, I highlighted the fact that executive remuneration remains a ‘hot topic’ in corporate governance. Subsequent to that piece, two interesting reports on executive remuneration were published.
Executive Remuneration Working Group Final Report July 2016
The Executive Remuneration Working Group consists of Nigel Wilson (Chair), Group Chief Executive, Legal & General Group PLC; Russell King, Remuneration Committee Chairman, Aggreko PLC and Spectris PLC; Helena Morrissey, Chief Executive, Newton Investment Management and Chair, The Investment Association; Edmund Truell, Chairman of the Strategic Investment Advisory Board; and David Tyler, Chairman, J Sainsbury PLC and Hammerson PLC.
The Executive Remuneration Working Group has made ten recommendations relating to increasing flexibility (recommendation 1); strengthening remuneration committees and their accountability (recommendations 2, 3, and 4); improving shareholder engagement (recommendations 5 and 6); increasing transparency on target setting and use of discretion (recommendations 7 and 8); and addressing the level of executive pay (recommendations 9 and 10).
The ten recommendations are as follows:
- Recommendation 1: There should be more flexibility afforded to remuneration committees to choose a remuneration structure which is most appropriate for the company’s strategy and business needs.
- Recommendation 2: Non-Executive Directors should serve on the remuneration committee for at least a year before taking over the chairmanship of the committee. The Financial Reporting Council (FRC) should consider reflecting this best practice in the UK Corporate Governance Code.
- Recommendation 3: Boards should ensure the company chairman and whole board are appropriately engaged in the remuneration setting process. This will ensure that the decisions of the remuneration committee are agreed by the board as a whole.
- Recommendation 4: Remuneration committees need to exercise independent judgement and not be over reliant on their remuneration consultants particularly during engagements with shareholders. To ensure independent advice is maintained, the remuneration committee should regularly put their remuneration advice out to tender.
- Recommendation 5: Shareholder engagement should focus on the strategic rationale for remuneration structures and involve both investment and governance perspectives. Shareholders should be clear with companies on their views on and level of support for the proposals.
- Recommendation 6: Companies should focus their engagement on the material issues for consultation. The consultation process should be aimed at understanding investors’ views. Undertaking a process of consultation should not lead to the expectation of investor support.
- Recommendation 7: Remuneration committees should disclose the process for setting bonus targets and retrospectively disclose the performance range.
- Recommendation 8: The use of discretion should be clearly disclosed to investors with the remuneration committee articulating the impact the discretion has had on remuneration outcomes. Shareholders will expect committees to take a balanced view on the use of discretion.
- Recommendation 9: The board should explain why the chosen maximum remuneration level as required under the remuneration policy is appropriate for the company using both external and internal (such as a ratio between the pay of the CEO and median employee) relativities.
- Recommendation 10: Remuneration committees and consultants should guard against the potential inflationary impact of market data on their remuneration decisions.
The full report is available at: http://www.theinvestmentassociation.org/assets/files/press/2016/ERWG%20Final%20Report%20July%202016.pdf
High Pay Centre: The State of Play
The High Pay Centre published its Annual Survey of FTSE100 CEO pay packages in August 2016 and found that there is ‘no end to the rise and rise in top pay’.
FTSE100 CEOs continue to see overall pay packages grow by at least 10% whilst other employees see little or no growth. This exacerbates the gap between the pay of bosses and the pay of workers.
The Survey highlights that in 2015:
- The average pay for a FTSE100 CEO rose to £5.48 million
- The average pay ratio between FTSE 100 CEOs and the average wage of their employees was 147:1
- The median FTSE 100 CEO pay was £3.973 million. This represents a slight increase from £3.873 million in 2014, but up from £3.391 million in 2010.
- The slower growth in median pay suggests that the increases in average pay are driven by big pay increases for a small number of CEOs at the top.
- One FTSE 100 company has employee representatives on the board. TUI, which recently merged with German incorporated TUI AG, has an airline pilot and a travel agent on its supervisory board.
- No FTSE 100 company currently publishes its CEO to employee pay ratio
The report ‘The State of Pay: High Pay Centre briefing on executive pay’ is available at: http://highpaycentre.org/files/The_State_of_Pay_2015.pdf
With the UK’s new Prime Minister, Theresa May, having a rather different take to her predecessor on executive remuneration, we can expect to see a shake-up in this area in the future with proposals such as companies having to publish the ratio between the pay of the CEO and the average worker in the business, and that ordinary employees should be involved in discussions over executive pay.
Chris Mallin 11th August 2016