Executive pay report urges companies to 'rebuild trust'

The report, drawn up by trade body the Investment Association, includes a call for firms to examine the pay ratios between chief executives and staff.

A five-person panel – including Sainsbury’s chairman David Tyler – also urges boards to explain why they have chosen their maximum pay level.

“We need to restore public confidence in executive pay”

Nigel Wilson, chairman of the Investment Association’s Executive Remuneration Working Group

However the report stops short of backing Prime Minister Theresa May’s proposal for binding shareholder votes on senior management salaries.

Executive pay has come under increased scrutiny in recent years, with the retail industry among those under the spotlight.

Last year Tesco boss Dave Lewis faced a shareholder revolt over his pay package, while Burberry chief Christopher Bailey faced a similar revolt in 2014.

“We need to restore public confidence in executive pay,” said Nigel Wilson, chairman of the Investment Association’s Executive Remuneration Working Group.

“Our report shows shareholders, boards and executives agree the current approach is not working, and want constructive collaboration to get it right.”

The 10 recommendations are:

• There should be more flexibility afforded to remuneration committees to choose a remuneration structure which is most appropriate for the company’s strategy and business needs.
• Non-executive directors should serve on the remuneration committee for at least a year before taking over the chairmanship of the committee. The Financial Reporting Council (FRC) should consider reflecting this best practice in the UK Corporate Governance Code.
• Boards should ensure the company chairman and whole board are appropriately engaged in the remuneration setting process. This will ensure that the decisions of the remuneration committee are agreed by the board as a whole.
• Remuneration committees need to exercise independent judgement and not be over-reliant on their remuneration consultants particularly during engagements with shareholders. To ensure independent advice is maintained, the remuneration committee should regularly put their remuneration advice out to tender.
• Shareholder engagement should focus on the strategic rationale for remuneration structures and involve both investment and governance perspectives. Shareholders should be clear with companies on their views on and level of support for the proposals.
• Companies should focus their engagement on the material issues for consultation. The consultation process should be aimed at understanding investors’ views. Undertaking a process of consultation should not lead to the expectation of investor support.
• Remuneration committees should disclose the process for setting bonus targets and retrospectively disclose the performance range.
• The use of discretion should be clearly disclosed to investors with the remuneration committee articulating the impact the discretion has had on remuneration outcomes. Shareholders will expect committees to take a balanced view on the use of discretion.
• The board should explain why the chosen maximum remuneration level as required under the remuneration policy is appropriate for the company using both external and internal (such as a ratio between the pay of the CEO and median employee) relativities.
• Remuneration committees and consultants should guard against the potential inflationary impact of market data on their remuneration decisions.

Reports emerged this week that Theresa May is considering drawing up legislation to curb excessive boardroom pay and improve corporate governance.

On the Investment Association report a government spokesperson said: “The Prime Minister has said she wants to see stronger shareholder oversight of executive pay and greater transparency including better reporting of bonus targets and pay ratios.

”She has also called for a simplification of the way bonuses are paid so that incentives are better aligned with the long-term interests of the company and its shareholders.”