The ten recommendations for executive pay reform

The Investment Association’s Executive Remuneration Working Group has proposed ten recommendations which it believes will rebuild trust in executive pay.

Consultations with more than 360 investors, asset owners and company employees provided the initial details which were then developed by five leading representatives of listed companies, investment management and asset owners.

The recommendations cover five subject areas and acknowledge that greater transparency and potentially stricter shareholder oversight is needed to keep executive pay levels in check.

The recommendations are:

Increasing flexibility

• There should be more flexibility afforded to remuneration committees to choose a remuneration structure which is most appropriate for the company’s strategy and business needs.

Strengthening remuneration committees and their accountability

• Non-Executive Directors should serve on the remuneration committee for at least a year before taking over the chairmanship of the committee. The Financial Reporting Council (FRC) should consider reflecting this best practice in the UK Corporate Governance Code.
• Boards should ensure the company chairman and whole board are appropriately engaged in the remuneration setting process. This will ensure that the decisions of the remuneration committee are agreed by the board as a whole.
• Remuneration committees need to exercise independent judgement and not be over reliant on their remuneration consultants particularly during engagements with shareholders. To ensure independent advice is maintained, the remuneration committee should regularly put their remuneration advice out to tender.

Improving Shareholder engagement

• Shareholder engagement should focus on the strategic rationale for remuneration structures and involve both investment and governance perspectives. Shareholders should be clear with companies on their views on and level of support for the proposals.
• Companies should focus their engagement on the material issues for consultation. The consultation process should be aimed at understanding investors’ views. Undertaking a process of consultation should not lead to the expectation of investor support.

Increasing transparency on target setting and use of discretion

• Remuneration committees should disclose the process for setting bonus targets and retrospectively disclose the performance range.
• The use of discretion should be clearly disclosed to investors with the remuneration committee articulating the impact the discretion has had on remuneration outcomes. Shareholders will expect committees to take a balanced view on the use of discretion.

Addressing the level of executive pay

• The board should explain why the chosen maximum remuneration level as required under the remuneration policy is appropriate for the company using both external and internal (such as a ratio between the pay of the CEO and median employee) relativities.
• Remuneration committees and consultants should guard against the potential inflationary impact of market data on their remuneration decisions.

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Owain Thomas