Reaction to government consultations on executive pay
Here’s some of the industry reaction to the government consultation on remuneration unveiled by Vince Cable, Secretary of State for Business, in a speech to the Liberal Democrat Party conference, 19 September 2011.
Sean O'Hare, reward partner at PwC, said:
"The sense that 'something must be done' about executive pay has been building up a head of steam for some time. The good news is that the government has chosen to consult widely on the issue, rather than rushing to new regulation. Non-executive directors and shareholders will welcome this document if it is the first step towards providing closure on this issue for a period of years. However, it is hard to see that the proposals as they stand will achieve much. In reality shareholders already have the tools they need to influence the pay decisions of remuneration committees if that is what they really want to do.
"As such the proposals, if implemented, could place a huge administrative and cost burden on businesses with limited benefit. The worst outcome would be increased time spent by management and remuneration committees navigating a new set of governance rules at the expense of spending quality time considering pay decisions.
"What is needed is more focus on simplicity. Performance-related pay has grown too complex and forms too great a proportion of the package, resulting in unintended consequences, volatile pay-outs, and frustration for shareholders, remuneration committees, and executives alike. As a highly open economy, the UK will always be subject to international market forces on pay but complexity has made matters worse. Simpler schemes, such as where executives are paid a competitive total package, but required to hold a significant proportion in shares for a long period, are more likely to enhance the long-term link between pay and performance."
On the narrative reporting consultation proposals, O’Hare said:
"Remuneration reports should be shortened to force clearer communication on the reasons behind pay decisions, rather than mandating further standard disclosures. The Strategic Report is a promising idea, which could increase the relevance and reduce the length of remuneration reporting.
“A simple, consistent disclosure on the relationship between reward and performance over a number of years would help shareholders make judgements about pay decisions. However, the issue with a standard disclosure is that what constitutes good performance can vary extensively between companies and at different times. Any proposed framework will need to strike the balance between being standard enough to enable comparisons between companies, without being so simplistic as to provide a distorting view. Achieving this will balance will be hard.
"The ratio of CEO to median pay is simply too distorted by issues such as business model, geographic spread and outsourcing to provide a helpful comparison between different companies. This could lead to much misunderstanding and misreporting. For example, a business that outsources low-paid functions will reduce its ratio, without having enhanced pay equality one iota. This ratio is really only meaningful when looking at trends within a single company over time, and even then must be used with care."
On executive pay consultation, O’Hare commented:
"The proposal to broaden remuneration committee membership faces major practical obstacles. Putting an employee on a remuneration committee is all well and good but ensuring the person has the necessary insight on the business (when they are not a full board member), and can report back to other employees effectively will be fraught with difficulty. There's also a question of their legal standing within the committee if they are not on the board. This issue could raise complex company law issues, and will need to be approached with care if it is to add to the quality of the debate rather than degenerate into grandstanding.
"The merit of giving shareholders extra issues to vote on is questionable. Through the vote on the remuneration report and non-executive directors, shareholders already have the tools to change company behaviour on pay if that is what they want to do. The uncomfortable reality is that executive pay is a much lower priority issue for shareholders than the government would like it to be. Equally it is not obvious that employee vote on remuneration report will improve decision making.”
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John Cridland, CBI Director-General, said:
“It is crucial that executive pay is squarely linked to performance, and there are cases where this link needs to be clearer. People should be rewarded for good work, and payment for failure is unacceptable, but it must be recognised that the jobs market for senior company executives is one where talent competes globally.
“We need shareholders to be more involved with the companies they invest in, and they should hold the board to account when it’s necessary. However, it is not the role of shareholders to micro-manage companies day-to-day. We welcome this consultation, but executive pay must not become a political football, and overly simplistic measures like ratios will not address the problem.”
High Pay Commission
Deborah Hargreaves, Chair of the High Pay Commission, said:
“Vince Cable’s focus on top pay is long overdue. Executive pay has raced away in recent years, leaving wages for the wider workforce far behind. As we showed in our recent report, there has been little corresponding increase in company performance. It cannot be right that executives are earning £4.5 million while workers’ wages are not keeping up with price rises. It is time for a reality check.”
Carol Arrowsmith, partner in the remuneration team at Deloitte, said:
“Deloitte welcomes the discussion paper on executive remuneration released by the Department for Business, Innovation and Skills today. We recognise the need to ensure a clear link between executive remuneration and company performance and are fully supportive of the need to review and debate the structure and governance of executive remuneration in the UK at this time. This paper provides an opportunity to consider whether current practices could be improved in a wide range of areas, from the processes used to determine executive remuneration, to the role of shareholders and the structure of remuneration.
“Our research indicates that there have been a number of positive changes to executive remuneration packages over the past few years. We have seen a significant increase in the proportion of remuneration which is deferred, in the level of shareholding required by directors and in the introduction of clawback provisions. There are also signs that companies are considering longer deferral and vesting periods. But we recognise that there is still some work to be done to ensure that pay and performance are more closely aligned and welcome the opportunity to debate how best to encourage more companies to move towards best practice.
“We particularly welcome the debate on whether there are better ways of measuring performance than those typically used. Our experience of working with some of the largest FTSE 100 companies suggests that the use of strategic performance measures can more effectively drive the behaviours needed to achieve the business strategy than more standardised ‘off the shelf’ incentive arrangements. We are also supportive of the proposals to make the disclosure of remuneration simpler and more meaningful.”
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