A Point/Counterpoint on Ten Recommendations to Rebuild Trust in Executive Pay

Rem.n commentary

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.

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.

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.

RECOMMENDATION 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.

• A good recommendation; we agree that remco chairs should have experience

• From our experience, the whole board is typically ‘appropriately engaged’

• As an independent advisor to remuneration committees, we agree

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.

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.

• Rem.n 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

• This is a potentially vital shift in emphasis from ‘lobbying’ to dialogue, 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.

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.

• Rem.n agrees; target setting is a vital element of a well-designed incentive pay programme

• 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.

RECOMMENDATION 10:

Remuneration committees and consultants should guard against the potential inflationary impact of market data on their remuneration decisions.

• Rem.n 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

• Rem.n has advocated for many years: benchmarking should offer guidance only