Executive Remuneration – A View from the UK

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    (This is a guest post by Nick Lindsay of Elemental CoSec)

    In recent years, executive remuneration has moved from its traditional ambit of corporate governance circles and company secretary forums to the public eye. In the UK, the last six months, has seen a particular focus on what many in the media see as ‘excessive executive pay’.

    At the end of January 2012, Stephen Hester the chief executive of the Royal Bank of Scotland (RBS) was forced to waive his bonus of nearly £1 million in shares. This was shortly followed by Fred Godwin (the former boss of RBS) being stripped of his knighthood following controversy over his remuneration.

    RBS is a special case as it is majority owned by the UK government (having been bailed out), but criticism over executive pay in general is rife. This culminated in the UK government announcing various measures that they hoped would curb executive pay going forward. The UK government is currently consulting on most of these but the framework is clear enough and I suspect the similar measures will be adopted in many other Western countries to the extent they haven’t already.

    Proposed UK Measures on Executive Remuneration

    1. Greater transparency over remuneration reports:

    The UK government wants to mandate a standardised form for remuneration reports with the aim of making them simpler and easier to understand. There will be one section setting out the company’s future remuneration policy for executives and a second section setting out how the previous year’s pay policy was implemented.

    The government also wants a single number included in the report for how much each executive was paid in the previous year and what the maximum is that they could be paid in the following year. However, this will lead to the difficult question of how to value long term share options and similar forms of remuneration. Presumably a standard method of valuation will be required but we have yet to receive any information on this.

    2. Forward looking binding vote on pay policy:

    UK shareholders will get a binding vote on the pay policy for the upcoming year. What is unclear is what level of approval will be required to pass the vote (50% or 75%) and what happens to the executives’ pay if the vote is lost.

    3. Backward looking advisory vote on pay policy:

    Similar to the current situation in the UK, shareholders will have an advisory vote on the implementation of the previous year’s pay policy. A binding vote was considered but rejected because of the legal issues if the vote was lost.

    4. Director’s notice periods greater than one year:

    In line with the current UK Corporate Governance Code, shareholders will get a vote on any notice period for a director greater than one year which, in practice, is likely lead to any such notice periods disappearing.

    5. Exit payments:

    Shareholders will get a vote on any exit payments greater than one year’s basic salary or the minimum contractual amount (whichever is the greater). This is meant to stop, so called, rewards for failure but could lead to some interesting votes as one years’ basic salary can (relatively speaking) be quite low when a large part of an executive’s remuneration is often made up of performance related pay.

    6. Ban on Executives servicing on Remuneration Committees:

    Although it is a relatively rare practice, there will be a ban on serving executives of one FTSE company sitting on the remuneration committee of another FTSE company. This is to stop the perceived conflict of interest that could arise from this situation.

    7. Remuneration Consultants:

    Companies will have to disclose details around any remuneration consultants they use which will probably include, how they are appointed, to whom they report and whom they advise and their fees.

    8. Clawback provisions:

    The government has asked the Financial Reporting Council (the body responsible for the UK Corporate Governance Code) to consult on introducing provisions in the Code mandating companies to have claw back provisions for directors pay. Presumably this will be for the performance related parts of a director’s pay if the long term performance of the company doesn’t meet expectations.

    The UK government is also supporting a new institution called the High Pay Centre which is a (non-governmental) body set up to monitor executive pay and evaluate if these provisions are making any difference.

    Conclusion

    I suspect that these proposals will make some minor differences, especially around exit payments for leaving directors which often cause the greatest media controversy. They will also lead to some interesting headlines when companies publish a total figure for the remuneration awarded to the top executives.

    However, in the majority of cases the main driver of executive pay is not corporate governance or lack of shareholder oversight, it’s the global market. Until this starts to change, executive pay will, broadly, keep operating as it has done recently.

    This article has been provided by Elemental CoSec for informational purposes only and should not be relied upon as specific advice or acted upon without seeking specific legal advice.