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UK pay working group proposes reforms of executive pay

  • UK Pay for Performance not Fit for Purpose
  • Increasing disparity between CEO & stakeholder rewards
  • Scepticism and loss of public confidence in business

Coming in the wake of some large votes by UK shareholders against executive pay, the Executive Remuneration Working Group launched by the Investment Association has produced its interim report providing recommendations that it hopes will produce more satisfaction by investors and company bosses.

The report – produced by a group of institutional investors and corporate leaders – notes that remuneration takes up a lot of the time spent in talks between shareholders and management when there may be more significant issues that should be discussed.

The report also states that markets are trading at broadly the same levels as eighteen years ago and 10% below its peak– however executive pay over the same period has more than trebled and there is an increasing disparity between average wages and executive wages. This misalignment has resulted in widespread scepticism and loss of public confidence. Failure has sometimes been rewarded, and use of median comparators has driven disproportionate rises in executive remuneration.

Nigel Wilson, chairman of the executive remuneration working group, said, “The current approach to executive pay in UK listed companies is not fit for purpose, and has resulted in a poor of alignment of interests between executives, shareholders and the company”.

“Greater transparency, clearer alignment of shareholder, company and executive interests, more accountability on the part of Remuneration Committees and greater engagement with and control by shareholders, working through company boards, are vital to restore confidence in a system widely seen as broken.”

The report states that the Working Group is of the opinion that the near-universal usage of a three-year long-term incentive performance model overly constrains consideration of other remuneration structures, which may be more appropriate to a company’s own business model and strategy

Simon Walker, Director General of the Insititute of Directors, welcomed the report, “It is increasingly clear that there is a problem with executive pay at big listed companies. The introduction of binding votes on pay policy has not had the kind of immediate and positive impact regulators and government would have wanted. Whilst some improvements have been made, the rebellion over BP’s remuneration report last week has shown that there is still considerable shareholder unhappiness.

“Today’s report is a timely and important intervention in the debate around how remuneration is designed. We are pleased that the report has called for pay-setting to recognise company performance, be clear and simple, and aligned with shareholders’ interests.

“Importantly, the report also recommends that pay policies for senior executives are consistent with the approach for other employees. This is a worthy intervention that, if adopted by the market, could go a long with to restoring trust in our largest companies. The current approach to executive remuneration is failing. We are looking forward to engaging with this worthwhile initiative, and urge FTSE boards to do the same”.

Tom Gosling, head of pay, performance and reward at advisory firm PwC, said, “The Working Group’s design proposals would significantly increase the freedom for remuneration committees to develop simpler, more transparent pay structures tailored to their specific circumstances.

“There’s still the formidable challenge of getting wide-spread acceptance for the proposals from investors and proxy voting agencies. If this can be done then we could see real benefits from these proposals. If not then they won’t amount to much.”

However, Cliff Weight, editor of the Manifest Total Remuneration Survey is less enthusiastic about the Working Group’s approach: “My guess would be that the net present value of future remuneration payments to FTSE100 CEOs will increase as a result of all these discussions and future changes. The issue of quantum needs to be addressed and remuneration creep needs to be reversed. Not only does excessive remuneration need to be curtailed, but the median levels also need to be reduced.”

The working group will consult stakeholders in a series of roundtables over the next two months before producing a final report. The IA has informed the Working Group of its intention to review whether to adopt their recommendations in its Principles of Remuneration after the publication of the working group’s final report.

From an investor’s persepctive, Ashley Claxton of Royal London Asset Management struck a note of caution on the report: “The interim report outlines some interesting ideas worth exploring, but investors need to consider the unintended consequences of some of the recommendations. Whatever the result, more emphasis needs to be placed on the remuneration committee to take responsibility for pay decisions and pay models need to be tied to long-term, sustainable performance.”

What do you think?