Executive rewards: paying for success
28 June 2019
In a report from the Business, Energy and Industrial Strategy Committee, further recommendations are made to address the high levels of executive reward.
The report ‘Executive rewards: paying for success’ acknowledges that the Government has recently overseen the implementation of a major package of reforms to strengthen the framework within which companies set executive pay. They include the introduction of pay ratio reporting requirements and stronger UK Corporate Governance Code provisions requiring remuneration committees to engage with the wider workforce to explain how executive pay fits with wider employee pay.
The Government also recently legislated through The Companies (Directors’ Remuneration Policy and Directors’ Remuneration Report) Regulations 2019 to implement the executive pay aspects of the revised Shareholder Rights Directive. These regulations will give shareholders further useful information that they can use to assess how rewards to directors are matched by performance and to compare the annual change in directors’ remuneration to the annual change in average employee pay over a rolling five-year period.
In addition, when the recommendations made in the Independent Review of the Financial Reporting Council have been implemented, the new regulator is expected to have stronger powers to monitor and enforce companies’ compliance with relevant reporting requirements on executive pay and corporate governance. These are areas of reporting that are not fully within the scope of the regulator’s current corporate reporting review powers.
These recent measures build on reforms introduced in 2013 under which public companies are required to disclose the total remuneration for each director every year and to bring forward a directors’ remuneration policy at least once every three years which is then subject to a binding shareholder vote.
Taken together, the current UK framework gives shareholders the information and the powers with which to hold companies to account on executive pay. Shareholders are increasingly demonstrating their readiness to voice their dissatisfaction over executive pay when it is poorly structured or not matched by performance. There was a sharp rise in shareholder objections to FTSE100 executive pay last year—18 of the FTSE100 attracting shareholder opposition of 20% or more, double the number of the previous year.
The Government has stated that its immediate priority is to focus on the effective implementation and then assessment of the most recent reforms before considering significant further changes. However, the Government was clear in its response to the consultation on the Corporate Governance Reform Green Paper in 2017 that it would monitor the impact of the reforms and would consider further action at a future point unless there is clear evidence that companies are taking active and effective steps to respond to significant shareholder concerns about executive pay outcomes.
Recommendations in the report include:
- that the new regulator clarifies and strengthens its guidance on executive remuneration with a view to exerting significant downward pressure, avoiding unjustifiable payments and ensuring that, if they are made, they can be readily recovered.
- that companies should be required to appoint at least one employee representative to the remuneration committee to ensure that there is full discussion of the link between executive pay and that of the workforce as a whole.
- that pay ratio reporting requirements be expanded to include all employers with over 250 employees and that the lowest pay band be included alongside the quartile data required.
Pages 33 to 36 of the report ‘Executive rewards: paying for success’ details all the recommendations (of which there are several) made by the Business, Energy and Industrial Strategy Committee and also the responses from government.