Time for new approach on executive pay

Last month, ICAEW and Hermes convened a senior panel of remuneration committee chairs and investors, along with Anna Turley, MP for Redcar, to explore how realigning executive pay can help to restore trust in business, reports Julia Root-Gutteridge, ICAEW Manager for Board Effectiveness.

August 2019

With 2019 proving to be a key year in the UK executive pay landscape, many companies are preparing new remuneration policies for a binding shareholder vote in 2020. The panel (see below) and audience at the ICAEW’s Corporate Governance Community event, held in July with investment manager Hermes, raised a number of executive pay issues:

• Remuneration committees must invest significant time and energy to engage with investors to drive reform, leaving space to change their ideas. Investors need to signal their openness to change.
• Simplicity in remuneration packages isn’t everything – more nuanced measures could bring about better results in the longer term.
• This debate must address wider questions around workforce pay. It is a global issue, not just a UK discussion.

The issue of executive pay was placed in the context of the economic status of Anna Turley’s constituency, which saw 3,000 jobs cut following the collapse of Redcar Steelworks in 2015. The call to address excessive executive pay stems not from the politics of envy, but a need to create fairness in business.

Remuneration committees

Audience questions included:

• Should remuneration committees still exist?
• Should executive pay be linked to employee pay?
• Should boards take more responsibility for setting pay packages?

There were over-riding calls for remuneration committees to engage shareholders on their reform ideas as early and as thoroughly as possible, though it was acknowledged that some investors remain cautious about alternative approaches. Remuneration committees must be clear on the rationale for their plans and why they are appropriate for the company. 

Examples of successful reform were given where remuneration committees succeeded by embarking on a deep, thoughtful and often time-consuming engagement process to drive change. 

Incentives and performance measures

Greater simplicity and transparency in incentive programmes was called for, but there was an acknowledgement that complexity can be an unavoidable outcome. While many felt that cash, bonus, and long-term incentive schemes have failed and require reform, an audience member made the case for short-term bonuses when quick results are needed. 

One suggested reform was to place weighting on strategic measures of performance, rather than purely financial outcomes. This could include how well executives embed a clear purpose into a firm. This is a more complex and less transparent approach but could create more sustainable outcomes in the long-term. 

A point was made that a very strong connection exists between long-term, long-held stocks forming the remuneration package and high performance and innovation. It is possible but difficult to move to this model. The pace of change is slow and requires considerable bravery. 

Workforce 

Firms should explain executive pay policy to the workforce, and townhalls can be a good vehicle for this. The value of creating company ownership for all employees was highlighted, as this can create a positive environment in which everyone has a stake in the fortunes of the company.

Impact of global forces

An audience member suggested that the biggest issue is how access to an abundance of globally mobile talent suppresses wage growth. Issues around the UK’s competitiveness for attracting and retaining top talent were also raised. The panel called on remuneration committees to be mindful of global pay structures, not just those in their jurisdiction.

Panel

• Iain Wright, ICAEW (Chair)
• Anna Turley MP, Labour (Co-op) member for Redcar and member of the BEIS Select Committee 
• Clare Chapman, Weir Group (remuneration committee chair)
• Sam Laidlaw, Rio Tinto (remuneration committee chair)
• Paula Rosput Reynolds, BP (remuneration committee chair), BAE Systems (remuneration committee chair)
• Dr Hans Christoph-Hirt, Hermes Investment Management 
• Ola Peter Gjessing, Norges Bank Investment Management

Julia Root-Gutteridge is ICAEW Manager for Board Effectiveness, ICAEW

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