GOVERNANCE AND ETHICS The determination of directors' remuneration policies and packages in UK listed companies (Cranfield University)

The determination of directors' remuneration policies and packages in UK listed companies

Ruth Bender (Cranfield University)

Project reference 5-413

This research project has been completed.

A free briefing, The determination of directors' remuneration in UK listed companies was published in May 2004. Copies are free to download or call the Centre for a hard copy on + 44 (0)20 7920 8634.

More publications from the Centre.

Main objectives of research

This research project was designed to find out how FTSE 350 companies determine the pay of their executive directors. Although directors’ pay is a very visible area of corporate governance, previous academic research has focused on statistical analysis, comparing pay to various corporate factors. In contrast, this study is based on face-to-face interviews with the protagonists in the remuneration-setting decision at 12 FTSE 350 companies. Rather than look at how much was paid to the executives, its aim was to establish how the pay level and structure were determined.

Work done

The work commenced with an extensive review of the academic and practitioner literature, which informed the research design.

Interviews were carried out with 35 individuals at 12 FTSE 350 companies. The interviewees included chairmen of remuneration committees, other non-executive directors, human resource (HR) professionals, CEOs, company secretaries, a company chairman and the remuneration consultants employed by the companies. In addition, a further interview was carried out with an institutional representative, to obtain an investor’s view of the early research findings.

The interviews were taped and transcribed, and the transcripts have been analysed to determine the key themes underlying companies’ remuneration-setting processes.

In summary, the research findings are as follows:

    • Companies determine the level of executive pay by making comparisons with other companies, using ‘market rates’.
    • The choice of comparator companies has a significant impact on the level of pay a company will adopt.
    • The structure of executive pay – how much is performance-related and how this is constructed – will depend on the company’s industry and strategic characteristics. Again, comparisons with other similar companies play a major part in the choice of schemes.
    • Although performance-related pay (PRP) is universally adopted, many of the participants had doubts as to whether it actually motivated performance at this high level in the organisation. Several reasons were given for adopting PRP, ranging from company characteristics and the need to focus executives’ attention, through to the fact that it is expected as an aspect of good governance.
    • The performance measures and targets chosen by the company are critical to the success of the scheme.
    • Every company in the research was able to ‘tick the boxes’ as having complied with good governance. However, in each of them the remuneration-setting process and the interaction between the protagonists differed.

    The implications of this research are relevant to practitioners and to regulators. Executives and remuneration committee members need fully to understand their roles, and how they interact. They also need to appreciate the impact on the company of the decisions they make regarding executive pay. For regulators, it is useful to establish that the layers of governance regulation can set minimum standards, but once these are implemented it is impossible to regulate the human relationships that underlie committee structures.

    Published outputs to date

    Bender, R. (2002). "Directors’ Remuneration and Shareholder Value", Management Quarterly, Faculty of Finance and Management of the Institute of Chartered Accountants in England and Wales, 15, April, pp6-11.

    Bender, R. (2002). "Directors’ Pay: Feeding Fat Cats or Rewarding Achievement?", Eclectic, Banking and Finance Faculty of the Chartered Institute of Bankers, 10, pp16-20.

    Bender, R. and Tyson, S. (2003) "Directors’ Pay – Another View", Finance and Management, Faculty of Finance and Management of the ICAEW, September, 9-11.

    Bender, R. (2003) "How Executive Directors’ Remuneration is Determined in Two FTSE 350 Utilities", Corporate Governance: An International Review, 11(3), 206-217.

    Bender, R. (2003) "The role of the remuneration committee", Management Quarterly, Faculty of Finance and Management of the Institute of Chartered Accountants in England and Wales, 21, October, pp13-16.

    Bender, R. and Porter, B.A. (2003). "Setting Executive Directors’ Remuneration in Listed Companies", Journal of Applied Management Accounting Research, 1(2), 27-47.

    Bender, R. (2004) "Why Do Companies Use Performance-related Pay for their Executive Directors?", Corporate Governance: An International Review, 12(4), 521-533.

    Spira, L.F. and Bender, R. (2004). Compare and Contrast: Perspectives on board committees, Corporate Governance: An International Review, 12(4), 489-499.

    Bender, R. (2005) ‘Just Rewards for a New Approach to Pay’, in FT Mastering Corporate Governance, pages 4-5, Financial Times, 3rd June 2005.

    Working papers available to other researchers

    Conference papers available on request to the researcher

    Bender, R. (2003) ‘Why do Companies use Performance-related Pay for their Executive Directors?’ 6th International Conference on Corporate Governance and Direction, Henley, 6th – 8th October.

    Spira, L. and Bender, R. (2003) ‘Compare and Contrast: Perspectives on Board Committees’, 6th International Conference on Corporate Governance and Direction, Henley, 6th – 8th October.

    Other conference presentations

    At the EAA May 2005, Ruth presented:

    'Onwards and Upwards: Why Companies Change their Executive Remuneration Schemes, and Why This Leads to Increases in Pay' authored by Ruth Bender.

    and

    'Does ‘best practice’ in setting executive pay in the UK encourage ‘good’ behaviour?' co-authored by Ruth Bender and Dr Lance Moir of Cranfield.

    The 'Best Practice' paper is also being presented by Lance Moir at a conference in the United States – 2005 annual meeting of the International Association for Business and Society in Sonoma Valley, California, 31 March – 3 April.

    Information updated June 2005.