“The sense that ‘something must be done’ about executive pay has been building up a head of steam for some time. The good news is that the Government has chosen to consult widely on the issue, rather than rushing to new regulation. Non-executive directors and shareholders will welcome this document if it is the first step towards providing closure on this issue for a period of years. However, it is hard to see that the proposals as they stand will achieve much. In reality shareholders already have the tools they need to influence the pay decisions of Remuneration Committees if that is what they really want to do.
“As such the proposals, if implemented, could place a huge administrative and cost burden on businesses with limited benefit. The worst outcome would be increased time spent by management and remuneration committees navigating a new set of governance rules at the expense of spending quality time considering pay decisions.
“What is needed is more focus on simplicity. Performance related pay has grown too complex and forms too great a proportion of the package, resulting in unintended consequences, volatile pay-outs, and frustration for shareholders, remuneration committees, and executives alike. As a highly open economy, the UK will always be subject to international market forces on pay but complexity has made matters worse. Simpler schemes, such as where executives are paid a competitive total package, but required to hold a significant proportion in shares for a long period, are more likely to enhance the long-term link between pay and performance.”
Narrative reporting consultation proposals relating to executive pay
Commenting on some of the specific proposals, Sean O’Hare, reward partner at PwC, said:
“”Remuneration reports should be shortened to force clearer communication on the reasons behind pay decisions, rather than mandating further standard disclosures. The Strategic Report is a promising idea, which could increase the relevance and reduce the length of remuneration reporting.”
“A simple, consistent disclosure on the relationship between reward and performance over a number of years would help shareholders make judgements about pay decisions. However, the issue with a standard disclosure is that what constitutes good performance can vary extensively between companies and at different times. Any proposed framework will need to strike the balance between being standard enough to enable comparisons between companies, without being so simplistic as to provide a distorting view. Achieving this will balance will be hard.”
“The ratio of CEO to median pay is simply too distorted by issues such as business model, geographic spread and out-sourcing to provide a helpful comparison between different companies. This could lead to much misunderstanding and misreporting. For example, a business that outsources low-paid functions will reduce its ratio, without having enhanced pay equality one iota. This ratio is really only meaningful when looking at trends within a single company over time, and even then must be used with care.”
Executive pay consultation
Sean O’ Hare, reward partner, commented:
“The proposal to broaden remuneration committee membership faces major practical obstacles. Putting an employee on a remuneration committee is all well and good but ensuring the person has the necessary insight on the business (when they are not a full board member), and can report back to other employees effectively will be fraught with difficulty. There’s also a question of their legal standing within the Committee if they are not on the board. This issue could raise complex company law issues, and will need to be approached with care if it is to add to the quality of the debate rather than degenerate into grandstanding.
“The merit of giving shareholders extra issues to vote on is questionable. Through the vote on the remuneration report and non-executive directors, shareholders already have the tools to change company behaviour on pay if that is what they want to do. The uncomfortable reality is that executive pay is a much lower priority issue for shareholders than the Government would like it to be.”
“Equally it is not obvious that employee vote on remuneration report will improve decision making.”