With the focus on the pay of certain CEOs, executive remuneration received an uncomfortable level of media and political interest.
Shortly afterwards the Government published its proposals for enhanced shareholder powers. These include a binding vote on executive remuneration policy at least every three years and an annual advisory vote on its implementation.
The 'problem' of executive reward has several dimensions and these have emerged as a result of changes that have taken place over the last twenty years or so.
Three key aspects are:
Quantum: over time executive pay has increased by multiples of the rate of growth experienced by other employees. It has also increased at a rate perceived as inconsistent with returns to shareholders.
Performance: pay needs to be linked to performance but, for various reasons, many consider that current linkages are inadequate. An important related issue is what constitutes 'good' performance, particularly in periods of weak economic growth. Additionally, have constant demands for significant and relentless growth led to the performance and ethical breakdowns that have occurred in some companies? Perhaps steady, sustainable performance should be reconsidered as a worthwhile goal?
Governance: following the various changes of the last two decades, two effects seem prominent: greater disclosure often leads to a levelling-up of pay, and being in the public eye can result in remuneration committees favouring a standardised approach rather than one better aligned to the company's strategy and business.
This year's Remuneration Reports and AGMs are only a few weeks away. While the new shareholder voting provisions do not come into effect until later, will changes to executive pay emerge this spring? And if so, what direction might they take?
The key players in shaping the immediate response to the last year's events and the new regulations remain the non-executive directors who sit on each company's remuneration committee and the institutional investors which have major holdings in the particular firm. Based on contributions to PARC's programme last year, it seems as though some consensus may be emerging between these two parties. It appears there may be increasing agreement on the following points:
Simplicity: there is a need to simplify incentive arrangements.
Tailoring: plans are more effective when they reflect the strategies and goals of the particular company rather than following a standardised approach.
Shareholdings: many shareholding requirements need to be larger, and share-based rewards should be held for longer, enabling pay to align more strongly with long-term company performance.
Trust: there needs to be greater trust between institutional investors and remuneration committees. This depends on more open and transparent communication of reward plan design, how it is meant to link to performance, and - after the event - what that performance has been and how it has flowed through to reward payments. Currently, such reporting clarity is rare. Remuneration Committees will need to show their robustness in evaluating performance. Rebuilding this trust may reduce the requirement for multiple consultations and enable non-executive directors to exercise greater judgement in reward decisions.
Recently a new set of 'Remuneration principles for building and reinforcing long-term business success' were jointly issued by Hermes Equity Ownership Services, the National Association of Pension Funds, the BT Pension Scheme, Railpen Investments and USS Investment Management. Perhaps unsurprisingly given that the NAPF was a major contributor to PARC's autumn programme, these principles cover the four points above but place them in the broader context of encouraging long-term rather than short or medium-term business success.
Over recent years many companies have made progress in communicating their remuneration policies. Further changes will be needed in preparation for the new voting requirements and to comply with new disclosure regulations. We may see some companies anticipating these in this spring's remuneration reports.
A possibly more interesting aspect will be whether we start to see substantial changes in remuneration practices, including how performance is linked to reward and how this is explained. Our meetings indicated that the time seems increasingly right for companies to consider change. Yet some may be reluctant to be first movers and may need to overcome the perceived barriers and risks. However, perhaps this has been facilitated by a significant group of investors signalling the directions that they now favour.
Mairi Bannon, director, Performance and Reward Centre (PARC) and co-founder, Corporate Research Forum
