Executive Remuneration Working Group report provides recommendations to rebuild trust in executive pay

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27 Jul, 2016

The Executive Remuneration Working Group, established by the Investment Association, has published a report which provides ten recommendations to “rebuild trust in executive pay structures in the UK”.

The report indicates that “there is growing concern from both companies and investors with the current levels of executive pay and its complexity”.  The report also highlights that “a central cause of this complexity is that companies feel they are forced to adopt a one-size-fits-all LTIP model”.  This system, the report highlights “while intended to link long-term performance with shareholder experience, does not always reflect how a business works, or allow for the fact that it may not be possible to set meaningful long-term targets in all businesses”. 

In order to address these concerns, the Executive Remuneration Working Group, believes that there should be greater flexibility for companies to choose the most appropriate remuneration structures to suit their business needs and strategy.  They state that “remuneration structures need to be appropriate to the executives, company context and the business strategy”.  The report includes possible alternatives to illustrate what such flexibility might mean in practice.  The report stresses that these alternative approaches should not be seen as an exhaustive list or an approved list of alternatives to the current framework but should be seen as examples “designed to explore the practicalities of a more flexible system”.  

The report makes ten recommendations which consider how a more flexible system can be implemented.  The recommendations “encompass a range of behavioural and structural changes that are needed to improve the system and allow more flexibility”.  The recommendations fall under five areas: 

  • Increasing flexibility.  Within this area, the report recommends that remuneration committees should have greater flexibility to choose appropriate remuneration structures suited to the company’s strategy and business needs.
  • Strengthening remuneration committees and their accountability.  This area includes a proposal to the Financial Reporting Council (FRC) that the UK Corporate Governance Code should be updated to reflect “best practice” that Non-Executive Directors should serve on the remuneration committee for at least a year before taking over the chairmanship of the committee.  It also includes a recommendation that the company chairman and the whole board “are appropriately engaged in the remuneration setting process”.
  • Improving shareholder engagement.  This area includes a recommendation that shareholders should focus on the “strategic rationale” for remuneration structures and should make it clear as to their level of support on proposals made.   
  • Increasing transparency around target setting and use of discretion.  This area includes recommendations for increased disclosure by remuneration committees including the process for setting bonus targets and how the committee has exercised its use of discretion and how such discretion has impacted the remuneration levels.
  • Addressing the level of executive pay.  This area includes a recommendation that “the board explain why the chosen maximum remuneration level as required under the remuneration policy is appropriate for the company using both external and internal relativities”. 

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