Archive for the ‘Executive renumeration’ Category
BEIS Green Paper on Corporate Governance Reform
In November 2016, the Department for Business, Energy & Industrial Strategy (BEIS) issued a Green Paper on Corporate Governance Reform. The Green Paper states ‘The aim of this Green paper is to consider what changes might be appropriate in the corporate governance regime to help ensure that we have an economy that works for everyone’. It considers three specific areas of corporate governance which might be built on to enhance the UK’s current corporate governance framework. These areas are:
– executive pay
-strengthening the employee, customer, and supplier voice
– corporate governance in the UK’s largest privately-held businesses.
There are 14 Green Paper questions with six relating to executive pay, three to strengthening the employee, customer and wider stakeholder voice, and five relating to corporate governance in large, privately-held businesses. The consultation closed on 17th February 2017 and responses to the consultation will be made available by BEIS around May 2017. However, the responses will be made available in collated format and the anonymity of individual responses will be retained. Nonetheless those who have responded to the consultation are free to publish their own responses or make them more widely available.
An interesting article by Aime Williams and Madison Marriage ‘Investors back UK drive to curb executive pay levels’ (Financial Times, 18/19 February 2017, page 17,www.ft.com/Executive_Pay) reports that ‘some of the UK’s largest investors have revealed support for government proposals designed to curb high executive pay in the latest pushback against the widening wealth gap between bosses and workers’. The article cites the views of investors including Old Mutual Global Investors and Fidelity International; also the Pensions and Lifetime Savings Association (PLSA) which has a membership including over 1,300 pension schemes; and the Confederation of British Industry (CBI). The publication of pay ratios received broad support whilst other areas mentioned included more robust consequences for companies whose directors’ remuneration is not approved by shareholders and also implementing an annual binding vote on pay.
Turning now to the High Pay Centre, an independent non-party think tank focused on pay at the top of the income scale. It is interesting to note that the High Pay Centre joined forces with the Chartered Institute of Personnel and Development (CIPD) to submit a joint response to the Green paper consultation, marking the commencement of a formal relationship between the two bodies, to ‘advocate fairer and more ethical approaches to pay and reward’. Their recommendations include:
- All publicly listed companies should be required to publish the ratio between the pay of their CEO and median pay in their organisation.
- All publicly listed companies should be required to have at least one employee representative on their remuneration committee
- All publicly listed companies should be required to establish a standalone human capital development sub-committee chaired by the HR director with the same standing as all board sub-committees.
- The Government should set voluntary human capital (workforce) reporting standards to encourage all publicly listed organisations to provide better information on how they invest in, lead, and manage their workforce for the long-term.
The CIPD/High Pay Centre joint response is available at: http://highpaycentre.org/files/CIPD_and_HPC_response_to_BEIS_Green_Paper_on_Corporate_Governance_%281%29.pdf
Another High Pay Centre publication which is of particular interest in relation to pay ratios – which seem to be gaining increasing support from various quarters as we have seen earlier – is ‘Pay Ratios: Just Do It’ available at: http://highpaycentre.org/files/Pay_Ratios_-_Just_Do_it.pdf
Just a few responses have been mentioned in this blog in relation to executive pay but it seems as though overall the 14 questions posed in the Green Paper will have stimulated wide-ranging debate on key issues which will likely lead to significant reform of the UK’s corporate governance system in the not too distant future.
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