Remuneration committees at UK listed companies are to be given a broader remit under far-reaching revisions to Britain’s corporate governance code.
Under proposals published today by the Financial Reporting Council (FRC), the duties of directors who sit on remuneration committees (RemCos) will be widened so that they exercise greater discretion over executive pay awards, but also so that they oversee pay and incentives across the wider workforce.
The FRC’s consultation will also propose that executives be required to hold on to bonuses paid as shares for at least five years, to encourage leadership behaviour more strongly geared around the long-term success of a firm.
Stefan Stern, director of the High Pay Centre, said the change was a “step in the right direction”. But he added: “We should not be under the illusion that five years represents the long term – 10 would be better.”
The FRC proposals also confirm that companies look unlikely to be forced to appoint workers to their boards, as originally pledged by Theresa May but since retracted through the government’s Corporate Governance Reform whitepaper published this summer.
The FRC consultation includes all three options proposed by the whitepaper: to assign a non-executive director to represent employees, to create an employee advisory council, or to nominate a director from the workforce.
The TUC's general secretary Frances O’Grady said it was “good that the code recognises the key role workers’ voices play within businesses”.
“The next step is for the corporate governance code to recognise the important role that unions play in the long-term success of companies,” she added.
Within a new remit to oversee pay for the wider workforce, it’s likely that RemCos will be required to include part-time workers in their considerations of pay alignment with the boardroom.
CIPD chief executive Peter Cheese said he particularly welcomed this broader remit for RemCos. “This is an important step in encouraging businesses to be more active in capturing and acting on their people data and for boards and the remuneration committee to improve their understanding and oversight of people data,” he said.
“Such a move will require fundamentally changing the role and makeup of the remuneration committee to ensure it has the right levels of expertise and necessary time and support to carry out its expanded remit.”
Tom Gosling, leader of PwC's UK reward practice and executive fellow at London Business School, said it’s important that leaders and RemCo members don’t become overly fixated on exec pay in their quest to ensure a sense of fairness among workers and in wider society. The conversation around executive pay must be broadened out to ensuring workers have a good experience of work and are paid fairly, rather than just scrutinising those at the top, he told HR magazine.
“The focus needs to shift to: how do we improve the lot of ordinary working people as opposed to how do we close the gap?” he said. “Because I don’t think anyone feels any better about the gap if it’s closed and they’re not better off.”
He added: “A stat that very few people realise is that since the financial crisis exec pay hasn’t gone up in real terms, it’s fallen slightly, and inequality has reduced quite materially over that decade. So we’re now back to the same levels as the mid-1980s. But no-one feels better about that because almost everyone’s worse off.”
The FRC consultation also includes plans to require firms to publish their gender balance, building on recommendations made by the Hampton Alexander Review. It proposes these figures include the first layer of management below the board – and their direct reports – and includes all companies, not just the 350 biggest on the stock market. It does not propose similar disclosure on ethnicity but asks for views on this issue.
The proposals would also mean that companies that have a 20% vote against their remuneration report would have to explain how they intend to discuss the dissent with shareholders.
Paul George, the FRC’s executive director of corporate governance, said the revised code would enable RemCos to reject pay packages when a company’s performance had been falsely boosted by factors outside of executives’ control. “We believe this should restore some trust [in business] if companies respond in the way we expect them to,” he said.
Cheese added: “The FRC’s proposals are a welcome move to improve corporate governance in the UK. The proposals place a much greater focus on organisational culture and employee voice, meaning that company boards will need to invest more time and thought on strategic workforce issues than ever before. This is a significant step forward in recognising the value of the workforce and the need for its voice to be heard at board level.”
The corporate governance code is not mandatory but companies that ignore its provisions must provide an explanation. The FRC has given the public until the end of February to comment on its plans and will publish a final version in June.