BEIS Committee recommendations on executive pay
The House of Commons Business, Energy and Industrial Strategy Committee (the Committee) has recently published their third report on corporate governance. The report deals with several… Read more
The House of Commons Business, Energy and Industrial Strategy Committee (the Committee) has recently published their third report on corporate governance. The report deals with several topics on corporate governance including directors’ duties, directors’ remuneration and board composition. The Committee sets out the factors, such as globalisation, scarcity of talent, lack of shareholder engagement, remuneration committees not able or willing to challenge excessive pay awards, weak board and executive greed, that have contributed to increasing rates of executive pay. The report also contains a number of specific recommendations. This article summarises the report’s recommendation on executive pay.
- Bonuses: The Committee believes that there is a place for bonuses as part of remuneration package, provided that they are used to incentivise performance, rather than provide an additional reward for routine achievement, and that such bonuses do not represent an unjustifiably high proportion of the package as a whole. Therefore, the Committee recommends that companies make it their policy to align bonuses with broader corporate responsibilities and company objectives and take steps to ensure that they are genuinely stretching.
- Long-term incentive plans (LTIPs): LTIPs have traditionally been complex which has made the process of negotiating pay awards difficult for remuneration committees. The Committee highlights the concern that LTIPs have been used to avoid publishing a headline figure for salary which would be widely thought unacceptable. The Committee, therefore, recommends that LTIPs should be phased out as soon as possible and that no new LTIPs should be agreed from the start of 2018 and existing agreements should not be renewed. The Committee has further considered the advantages of deferred stock options and recommends that the Financial Reporting Council (FRC) consults with stakeholders with a view to amending the UK Corporate Governance Code (the Code) to establish deferred stock rather than LTIPs as best practice in terms of incentivising long-term decision making.
- Shareholder engagement on pay: The overall pay levels for executives have been ratcheted up to levels so high that it is impossible to observe a credible link between pay and performance. The Committee notes that deeper engagement with shareholders alone may not be a powerful driver of pay restraint and that the most straightforward measure is to make the shareholder vote on executive pay binding rather than advisory. Therefore, the Committee recommends that the FRC revise the Code to include a requirement for a binding vote on executive pay awards the following year in the event of there being a vote against such a vote over 25 per cent of votes cast. The Committee also adds that this requirement should be included in legislation at the next opportunity,
- Remuneration Committees: The Committee considers that employee representation on remuneration committees would represent a powerful signal on company culture and commitment to fair pay, and that such an option should be included in the Code. The Committee also notes that the lack of strong leadership in the remuneration committee has contributed to the rise in executive pay. Therefore, the Committee recommends that any Chair of a remuneration committee should normally have served on the committee for at least one year previously. To further incentivise strong engagement, the Committee recommends that the Chair of a remuneration committee be expected to resign if their proposals do not receive the backing of 75 per cent of voting shareholders.
- Reporting on pay and people policy: The Committee recognises that reporting on pay is too complex, unclear and unhelpful for the purposes of wider comparison. Greater clarity is required to improve compatibility and accountability, and in turn to build trust. Also, the Committee recommends that companies should set out clearly their people policy, including the rationale for the employment model used, their overall approach to investing in and rewarding employees at all levels throughout the company, as well as reporting clearly on remunerations levels on a consistent basis. The Committee further recommends that the FRC should consult with relevant bodies to work up guidance on implementing this recommendation for inclusion in the Code.
- Publication of pay ratios: The Committee recommends that: (i) the FRC should work with other relevant shareholders on the details and amends the Code to require the publication of pay ratios between the CEO and both senior executives and all UK employees; and (ii) the Government should require that equivalent pay ratios should be published by public sector and third sector bodies above a specified size.
In conclusion, the Committee agrees with the wider view that executive pay is causing damage to the generally good reputation of British business. However, in a global and market based economy in which UK companies compete for the best talent, the Committee does not believe that it would be helpful for Government to intervene directly. Instead, the Committee has set out the above recommendations in its report which it believes is required to make any progress in rebuilding public trust in this matter.