Executive Remuneration Working Group issues ten recommendations to rebuild trust in pay
Tuesday 26 July 2016
The Executive Remuneration Working Group has today issued a Final Report
proposing ten recommendations to rebuild trust in executive pay structures in the UK, following consultation with over 360 investors, asset owners and company employees.
The Report represents a far-reaching plan to simplify pay structures for company bosses while improving the alignment of their interests with those of the shareholders who own their businesses.
Developed by five leading representatives of listed companies, investment management and asset owners, the report calls for companies to be given the flexibility to select the right pay structure that works for them and their shareholders, rather than focusing solely on the currently dominant ‘one-size-fits-all’ Long-Term Incentive Plan (LTIP) pay structure.
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.
It also acknowledges the recent contribution to the debate by UK 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.
To move away from the current LTIP model, 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.
Chair of the Executive Remuneration Working Group, Nigel Wilson, said:
“I believe the 10 recommendations outlined in today’s report on Executive remuneration 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 Investment Association, which represents the UK’s £5.5trn asset management industry and served as the secretariat to the group, today 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.”
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Notes to editors:
The Final Report can be viewed here.
The Executive Remuneration Working Group is an independent panel of experts set up last year to review pay structures at UK listed companies. The Investment Association provides secretariat services to the Working Group.
The panellists are:
- 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
- David Tyler, Chairman, J Sainsbury PLC and Hammerson Plc
The Final Recommendations are as follows:
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 7. Remuneration committees should disclose the process for setting bonus targets and retrospectively disclose the performance range.
- 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.
- 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.
- 10. Remuneration committees and consultants should guard against the potential inflationary impact of market data on their remuneration decisions.
About the Investment Association:
- The Investment Association is the trade body that represents UK investment managers who manage over £5.5 trillion on behalf of clients.
- Our purpose is to ensure investment managers are in the best possible position to:
- Build people’s resilience to financial adversity
- Help people achieve their financial aspirations
- Enable people to maintain a decent standard of living as they grow older
- Contribute to economic growth through the efficient allocation of capital
- The money our members manage is in a wide variety of investment vehicles including authorised investment funds, pension funds and stocks and shares ISAs.
- The UK is the second largest investment management centre in the world, after the US and manages 37% of all assets managed in Europe.