We attended the launch of The Investment Association’s Executive Remuneration Working Group meeting on 26th July, where their new report outlining ten recommendations to rebuild trust in pay was released. This report was developed by representatives from companies listed in the UK, as well as investment managers and asset owners and its stated goal is to simplify executive pay structures. Below, I offer some commentary and perspective on each of these recommendations.
Increasing Flexibility
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.
Pearl Meyer perspective:
- This is an important move in the right direction for remuneration committees (‘remcos’).
- Pearl Meyer strongly advocates no one size fits all.
- The working group’s four different long-term incentive suggestions offer a limited choice but, they will raise the likely status of restricted shares from ‘use only if we have to recruit in North America’ to common practice in the UK (note: the Working Party advocates a 50% discount on restricted stock).
Strengthening Remuneration Committees and their Accountability
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.
Pearl Meyer perspective:
- A good recommendation; we agree that remco chairs should have experience.
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.
Pearl Meyer perspective:
- From our experience, the whole board is typically ‘appropriately engaged’.
RECOMMENDATION 4:
Remuneration committees need to exercise independent judgment 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.
Pearl Meyer perspective:
Improving Shareholder Engagement
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 [the] level of support for the proposals.
Pearl Meyer perspective:
- Pearl Meyer agrees.
- Shareholders have insufficient time available for such discussions, in practice.
- Those companies planning a new policy for September 2016 are going to be putting their investors under pressure.
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.
Pearl Meyer perspective:
- This is a potentially vital shift in emphasis from ‘lobbying’ to dialog, so long as shareholders have the bandwidth to engage.
Increasing Transparency on Target Setting and Use of Discretion
RECOMMENDATION 7:
Remuneration committees should disclose the process for setting bonus targets and retrospectively disclose the performance range.
Pearl Meyer recommendation:
- Pearl Meyer agrees; target setting is a vital element of a well-designed incentive pay programme.
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.
Pearl Meyer perspective:
- Use of discretion, so long as management and shareholders trust (this is key) the remco, is vital because too much faith is placed on ‘objective’ measures, which do not suit fast growing, new businesses.
Addressing the Level of Executive Pay
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.
Pearl Meyer perspective:
- Pearl Meyer agrees internal relativities, especially with regard to incentive pay, could be incorporated into pay policy design; CEO to employee pay ratio, percent of employees eligible/receiving pay-out, total incentive spend and company-wide incentive schemes could be potential indicators.
RECOMMENDATION 10:
Remuneration committees and consultants should guard against the potential inflationary impact of market data on their remuneration decisions.
Pearl Meyer perspective:
- Pearl Meyer has advocated for many years: benchmarking should offer guidance only.
For more information about how Pearl Meyer London can help your remuneration committee, please contact me at simon.patterson@pearlmeyer.com. To review a copy of the full report, go to theinvestmentassociation.org.
