The AGM season is underway and, once again, it’s being dominated by the clash between remuneration committee chairmen and dissenting shareholders. New guidelines and regulatory reforms have been designed to make executive pay simpler and fairer, but there is still confusion about how to link rewards to business performance.
In Criticaleye’s poll
of non-executive directors conducted last year, over half (54 per cent) of respondents said the Remuneration Committee (RemCo) Chair had the most challenging position on the board.
, Director of Programme Management at Criticaleye, says: “While the RemCo chair needs to balance the interests of various stakeholders, their primary focus must be to align the remuneration strategy with the business strategy.
“To do that successfully, the RemCo needs the full support of the wider board, including the chairman, as the pressure that shareholders and proxy voting advisor groups can exert on companies is getting stronger.”
, Criticaleye Board Mentor and Chairman of Novaquest Capital Management, notes that independent directors can have differing approaches to remuneration. “In some instances, the RemCo did not want to increase executive pay but the board disagreed and pushed it through, despite the company not performing to the necessary level,” he comments.
Clearly, such disharmony should be avoided, but doing so means uniting varried perspectives and interpretations.
Checks & Balances
The spotlight on executive rewards will intensify. Last November, the Department for Business, Energy & Industrial Strategy (BEIS) published its Green Paper
on corporate governance reform, which has a section on establishing an appropriate framework for top-level remuneration and compensation.
Ideas put forward in the Green Paper include tougher consequences on companies losing their annual advisory vote on the remuneration report, plus encouraging individual retail shareholders to exercise their rights to vote on pay and other corporate decisions.
Tom adds: “This appetite for tighter controls on executive pay shows no sign of diminishing – this is not just relevant for the FTSE 100. If you’re a smaller listed company, or a private one for that matter, you need to give serious thought to how you’re drawing the link between business performance and executive reward.”
Part of the challenge for listed companies over the last 15 to 20 years has been the move towards rewarding management performance in the context of total shareholder return.
, Partner for Bird & Bird and Head of the firm’s Employee Incentives and Benefits Group, explains: “You can see how the inflation in executive pay has happened with the move from one-off awards of options, to annual awards of free shares − and then from a 1x annual salary limit to 2x. If you’re getting 2x your annual salary and free shares, that’s pretty generous.”
The context in which Long-Term Incentive Plans (LTIPs) and deferred bonuses are granted can appear arbitrary to shareholders, particularly in the face of declining profits or significant business restructuring.
“To counteract the inflation in executive rewards, we will need to have awards over lower multiples of salary – I think that’s the way it’s going to have to go,” says Colin. “Similarly, with bonus plans, everyone seems to achieve targets at the top or middle of the range; targets at the bottom end seem to be harder."
So, given the ongoing uncertainty and technical complexity, how does a Plc RemCo Chair adopt a balanced approach to rewarding executives for their labour?
, Non-executive Director and RemCo Chair at Senior and former Human Resources Director at Bunzl, tries to remain pragmatic: “For me, the first thing the remuneration committee needs to do is to look at the requirements of the business and the overall strategy. How is it performing and what are the plans for the future?”
It’s unlikely shareholders will give the green light to an increase in CEO pay if the business is missing its numbers, notes Celia. “There are always exceptions as you might be putting a plan in place that really drives performance in a particular way, but you’ve got to look at what the other side would be thinking,” she adds.
It is also important to consider executive directors’ mindsets, as some are less driven by personal finance than others. Celia explains: “You need to reflect on your recruitment plans. Have you got somebody who is a long-term player? What is the motivation of that person?
“As a RemCo you need to understand that because, at the end of the day, your remuneration package is there to incentivise and motivate the management team – and that’s for the good of all shareholders.”
The problem remains that investors will have different interpretations of what ‘good’ means. For now, RemCo chairs will continue to walk a tightrope, trying to do what’s best for the business while also gauging the risk of a shareholder revolt.
This Community Update includes comments from a recent Criticaleye Discussion Group, How to Get Executive Pay Right, held in association with Bird & Bird.
Don’t miss our next Community Update with tips on how to balance a long-term strategy with business as usual.