The Executive Remuneration Working Group has now published its Final Report, building on its Interim Report which we covered in our bulletin here.
The Investment Association has informed the Working Group of its intention to review its Principles of Remuneration in light of the recommendations of the Working Group.
The timing is apt as Theresa May has signified her determination to tackle perceived excesses in executive pay with an annual binding shareholder vote on pay (rather than a binding approval of the remuneration policy every three years); more transparency, including full disclosure of bonus targets and publication of pay multiple data; and simplification of the way bonuses are paid.
The Working Group believes that there are five areas to help restore trust in the system, namely:
- strengthening remuneration committees and their accountability;
- improving shareholder engagement;
- increasing transparency in target setting and use of discretion;
- addressing the level of executive pay; and
- setting parameters to illustrate how different structures may operate to gain market trust
To help assist this, the Working Group has made ten recommendations, many of which chime nicely with what Theresa May has indicated is on the horizon, such as more disclosure for bonus arrangements and a call for Boards to explain why their company's maximum remuneration level is appropriate based on relativities such as the pay ratio between the CEO and median employees.
The Final Report is a welcome contribution to the debate but, in contrast to Theresa May's proposals which have attracted much media attention together with the backing of Fidelity, one senses a slightly muted reaction to the report, particularly given that it does not prescribe a particular course of action. Indeed, the thrust of the report is very much to leave it to companies to decide what works best for them (although making share awards conditional on performance to the date of grant has been dropped as a potential suitable structure and, curiously, market value options receive only lukewarm acceptance, seemingly on the basis that there is no downside for underperformance).
The Final Report does not comment on Theresa May's proposal for annual binding shareholder votes on pay as the Working Group has not had time to consider all the options for the implementation of a binding vote and the impact such a policy change would have on market practice and the ability of UK companies to attract talent.
It is clear that there are now many interested parties all pulling in the general direction of change including:
- Government intention to "curb" excessive executive pay inflation;
- media attention continuing to highlight this issue (not just pay levels but also the pay debate detracting from other important corporate governance debates such as stewardship and succession planning);
- Remuneration Committee frustration at having a complex and, for some, broken model;
- shareholder attitudes changing. For example, fund managers have usually been known for focussing on the way executives are paid, rather than how much but there are signs, both in the US and UK, that some fund managers are starting to raise quantum as an issue; and
- public reaction at high executive pay (sometimes being seen as being part of the same "moral" debate as tax avoidance and tax planning arrangements").
So where will this go? Much will depend on the reaction of the Investment Association, which has already informed the Working Group of its intention to review its Principles of Remuneration in light of the recommendations of the Working Group, and other institutional investor bodies and proxy advisers such as ISS, PLSA and PIRC. In the meantime, we are continuing to debate these issues with our clients so please contact either of us if you would like to discuss this further.