In 2015 the Investment Association established the independent Executive Remuneration Working Group (the Group). The Group, which was tasked with addressing concerns that executive pay has become too complex and is not fulfilling its purpose, published its final report in July 2016.
The Group's overall conclusion is that remuneration structures have become too complex and because they adopt a "one size fits all" approach, do not necessarily reflect the company context and business strategy in a particular organisation. Companies need greater flexibility to design remuneration structures that are appropriate for their needs. For that flexibility to work, there needs to be a rebuilding of trust between companies and shareholders.
The Group makes a number of recommendations that reflect that conclusion:
- Remuneration committees need greater flexibility to choose structures that are appropriate to the company's strategy and business needs;
- NEDs should serve on remuneration committees for at least a year before becoming Chairman of the committee. The FRC should consider reflecting this in the UK Corporate Governance Code;
- The whole board should be appropriately engaged in the remuneration setting process, to ensure that decisions are agreed by the board as a whole;
- Remuneration committees should exercise independent judgment and not be overly reliant on remuneration consultants. Remuneration advice should regularly be put out to tender;
- Shareholder engagement should focus on the rationale for remuneration structures, from both an investment and governance perspective. Shareholders should be clear with companies about their views/ level of support for proposals;
- Consultation with shareholders should focus on obtaining investor views. There should not be an expectation of shareholder support for proposals;
- The process for setting bonus targets should be disclosed, as should the performance range on a retrospective basis;
- The exercise of discretion should be transparent, with the remuneration committee explaining the impact of discretion on remuneration outcomes. Shareholders expect remuneration committees to take a balanced view of discretion;
- Boards should explain why the chosen maximum remuneration level is appropriate on the basis of internal (such as the ratio of CEO to median employee pay) and external relativities; and
- Remuneration committees should guard against the potentially inflationary impact of market data on remuneration decisions.
Although the focus of the Group was on achieving a market based solution to the issues, the report comments on recent suggestions that a binding vote on executive pay could be introduced. One suggestion is that instead of requiring all companies to hold a binding vote on pay annually, a requirement for a vote could be targeted at companies that have not received support for their remuneration report in the previous year from 75% of shareholders.