UK Working Group Recommends Voluntary Pay Ratio and More Tailored Pay Arrangements, But Declines Binding Say on Pay
July 29, 2016
This week, an independent group of experts appointed to examine and review the executive pay structures of UK companies published its final recommendations, calling for companies to have more flexibility to design pay to match company strategy and business needs, but also calling for a voluntary pay ratio disclosure to avoid "remuneration creep." The working group, initiated by the Investment Association, which represents investment managers, is comprised of five individuals, including CEOs of large investors, a compensation committee chair and an attorney. It had been formed to examine the current pay practices at UK companies in an effort to rebuild the trust between companies and the public. According to the report, the major problem plaguing executive pay plans is their complexity, especially in long-term incentive plans, as well as a push toward a "one-size-fits-all" approach. To remedy the problem and rebuild public trust in corporations, the report makes ten, "market-based recommendations," including:
- Compensation Committees should be given more flexibility to choose pay structures which best fit company strategy;
- Directors should serve at least one year on the compensation committee before becoming Chair;
- The Compensation Committee should not be overly reliant on consultants;
- Shareholder engagement should focus on the "strategic rationale" for remuneration structure;
- Companies should disclose the process for setting bonus targets as well as any use of discretion; and
- Boards should justify why the maximum pay levels are appropriate for the company by using internal and external relative comparisons ("such as a ratio between the pay of the CEO and median employee").
Although it was considered, a new binding say on pay vote was not among the recommendations, despite the policy being favored by new Prime Minister Theresa May. The report noted that UK-listed companies already hold a binding vote every three years on their remuneration policies, the second of which will occur in 2017, and that further study is required before an annual binding vote on pay levels is implemented. The voluntary pay ratio disclosure was included with the report, noting that Boards must take CEO pay levels into account with respect to market, but also must make sure that decisions are not determined by benchmarking alone, a practice which has created "remuneration creep."