On 26 March 2019, the Business, Energy and Industrial Strategy Committee published its report ‘Executive rewards: paying for success‘. The report is part of the Committee’s review of corporate governance, and considers progress on the government’s attempts to address the gap between chief executive pay and company performance/employee pay.
The report notes that “huge differentials have been baked into the pay system, in part by a heavy reliance on over-generous, incentive-based pay and partly by the weakness of remuneration committees which design ever more complicated and opaque pay packages for their peers.”
Whilst welcoming evidence of a shift to extended terms for LTIPs, the Committee advocates a simpler structure based on fixed-term salary plus deferred shares (vesting over a long period), and a much-reduced element of variable pay.
It argues for a much stronger link between executive and employee pay – including by greater use of profit-sharing schemes. To strengthen this link, the Committee recommends an employee representative on the Remuneration Committee. The Committee considered the revised Corporate Governance Code requirements (broadly, to have a director appointed from the workforce; a formal workforce advisory panel; and/or a designated non-executive director), and noted that whilst such measures are an improvement, they are not an adequate substitute for the permanent engagement achieved by Remuneration Committee membership.
The Committee welcomes the recent introduction of pay ratio reporting, but calls for it to be applied more broadly – for example, to be extended to include all employers (not just quoted companies) with over 250 employees.
Michael Carter, Partner at Osborne Clarke LLP commented “Whilst much of the report has a lot to commend it, some of its conclusions are perhaps a little simplistic. In my experience, most remuneration committees strive to do what is best for shareholders. Whilst more simplified pay structures may be more appropriate in some cases, they may not in others, which has been explicitly recognised by the Investment Association and other leading institutional shareholder bodies.”