The Remuneration Committee Vies With Audit To Lead On Responsible Corporate Direction
In Britain we like to say that we value diversity of all sorts in our businesses - from our globally reknown creative arts industries to our listed businesses, to our prized and nation-defining health and welfare sectors. But, like others across the globe, we also judge people on how much they earn. And there’s the danger - because the definition of pay has now become a judgement of value that is no longer connected to the creation of real value in 2019.
Since the financial crisis, credible voices exploring that thought from a multitude of directions have grown in number steadily, getting louder. For a country looking to differentiate itself with best practice on corporate governance at a time when its national image is suffering from the stasis of Brexit with no leadership in sight, there is no ducking the issue of overblown and out of touch executive pay.
Business is looked to for leadership, the Edelman 2019 trust barometer tells us in the UK. Don’t let the visible presence of a former UK Prime Minister there distract you - this is not about politics, it is about the thinking amongst business customers, consumers, clients - without whom it has no apparent purpose. Powered by a younger generation, they move to a rival, and the business goes bust…just look at UK retail, at the cutting edge of technological - and generational - change.
There was a time, not very long ago, when Audit was deemed the grown-up place to be in the boardroom. (And of course, those committees were the hardest ones for women to get onto). No More: remuneration is the place to be, which is why it is still so surprising that businesses struggle with a fast- changing role for HR, (which is, after all, stuffed with female talent) - but that’s for another time, another piece.
Bearing in mind that, according to the High Pay Centre, last year median pay for a FTSE 100 CEO pay leapt by 11% to £3.9 million, and opinion polls repeatedly show public support for draconian measures such as capping executives' pay…. and we are deluged with the thinking about the ‘lack of trust in business,’ there is some innovative thinking at last.
The High Pay Centre and CIPD have unveiled ideas on a new role required from that RemCom. Their research, they say, “ identifies a number of flaws with the existing model of the remuneration committee. It seems clear there is an ‘opportunity cost’ to the considerable resources companies expend on determining the pay of a small number of executives. Remuneration committees’ conceptions of company performance are also too narrow. This undoubtedly results from the narrow range of professional backgrounds from which committee members are drawn.” On this basis they make the following recommendations.
The recommendations are aimed primarily at the boards and shareholders of the major UK-listed companies covered by their research. However, they “should also be considered by policy-makers and regulators charged with guidance and oversight of corporate governance in the UK. Similarly, corporate culture, people management and fair pay practices are as important to privately owned companies as to those listed on public markets. Therefore, boards and owners of private companies should also consider implementing these recommendations” they say.
Here they are:
Companies should consider establishing a formal ‘people and culture’ committee in place of their remuneration committee. Those that choose not to do so should still demonstrate clearly, in their annual reports, how company pay practices relate to their strategy for people management and corporate culture. We have provided a draft ‘Terms of Reference’ to act as a template for those wishing to formally expand their remuneration committee’s remit to ‘people and culture’.
Companies should formally assess their non-financial performance – for example, by looking at their impact on different stakeholder constituencies, and reviewing their social and environmental performance. They should explain their methodology for this assessment – and the results – in their annual report. Performance in this respect should be a key consideration when making annual pay awards.
Succession planning and development of long-term executive capability within the organisation should be explicitly included in the committee’s remit, as should organisational fairness in relation to pay. Executive summary RemCo reform: governing successful organisations that benefit everyone
To this end, professionals with people management experience should be appointed to remuneration committees – or people and culture committees – as well as representatives of the company’s stakeholder communities, including its workforce.
Long-term incentive plans should be replaced as the default model for executive remuneration with a less complex system based on basic salary, with an incentive to deliver sustainable long-term performance provided by a much smaller restricted share award.
These all seem to me to be suggestions that are rooted in a holistic view of the purpose of a business in society - unlike many of the remuneration suggestions espoused by specialist consultants in executive pay.
The link to the full report should be here, or try the High Pay Centre site.
