Remuneration committees (RemCos) are facing fundamental challenges ensuring they are fully aligned to business performance and setting the right ‘tone from the top’, according to research from the Performance and Reward Centre (PARC).
The study, The UK plc Remuneration Committee: its evolving purpose, effectiveness and challenges, seen exclusively by HR magazine, explores the relationship between RemCos and the organisations they serve.
The report surveyed 40 individuals such as HRDs, RemCo advisors, and heads of reward, and found that RemCos need to overcome a number of challenges in order to increase their effectiveness. These include balancing risk and compliance, responding to uncertain economic conditions, engaging an increasingly diverse group of stakeholders, and setting the right tone from the top.
It identifies four divisions of RemCo effectiveness that chairs need to take into account: supporting sustainable business performance, managing key relationships, process and decision-making, and governance and capability.
PARC’s report explained that in the past pay systems have been blamed for mis-selling and risky trading due to executives putting excessive pressure on employees to hit targets. As a result some RemCo chairs are calling for the focus of committees to be widened to reward philosophy in the company as a whole.
PARC director Mairi Bannon told HR magazine that the role of the RemCo would continue to evolve. “The job of the remuneration committee, and especially its chair, is a formidable one,” she said. “They have to reward top executives fairly against a backdrop of growing regulation, continued public criticism, and an uncertain economy in an increasingly global labour market. They also have to create a balance between the interests of the stakeholders while assuring future performance.”
Bannon added that RemCos have become much more “high-profile”. “This is making them think more carefully,” she said. “The increased regulation they are dealing with has also meant RemCos have had to think differently. Often the government is asking them to be more transparent about decisions.”
The report reinforces the need for a clear link between RemCos and the wider strategy of the company they serve, to make remuneration strategy as effective as possible. “Chairs need to take time to think through what the overall people agenda needs to be for their business, and shape their reward decisions accordingly,” Bannon said.
Drew Matthews, partner at New Bridge Street, part of Aon, said RemCos have already overcome big challenges. “Since the recession and banking crisis the way RemCos work has improved significantly,” he said.
He agreed RemCos must refocus on how reward strategy ties in to overall business strategy, and ensure it supports sustainable business performance. “I hope we spend less time talking about governance, shareholders and regulation, and spend more time talking about strategy and performance,” he said.
He added: “We’ve lost sight of some basics. Let’s hope HR can influence RemCos in getting back to basics. Simplify it. Remember you’re in the business of knowing what incentivises people.”
Guy Jubb, global head of governance and stewardship at Standard Life Investments, said that RemCos “need to grasp the nettle of executive pay structure complexity”.
“Investors are looking for not only much clearer alignment of pay with strategy but also how pay in the boardroom is connected with pay elsewhere in the organisation,” he added.