NOT FOR THE FAINT HEARTED…
Several high profile cases of overly generous pay packages, which have not translated in commensurate improved company performance, have reduced trust in business and increased shareholder unrest. This, combined with intense media scrutiny, has led to greater pressure on remuneration and pay packages. As a result the role of RemCo Chairs has become increasingly challenging.
A BALANCING ACT...
In practice RemCo Chairs are continuously having to balance the different agendas of many internal and external stakeholders, from regulators and policy makers, who are looking to align business practices with the interests of our wider society, to senior leadership teams whose mandates are getting harder in an increasingly tough economic environment; they are working harder than ever, yet facing increasing pressure to reduce earnings. RemCo Chairs are also accountable to shareholders, who vote both on the level and structure of board remuneration; our panel observed here that the few are often bullying the many and that fund managers and compliance heads, who don’t always see eye to eye, are compounding the problem.
THE CURRENT LANDSCAPE...
Research shows that 88% of FTSE 350 share the same structure of pay and incentives, typically a bonus of up to 100% - 150% and a pension scheme of not more than 20% of salary. In addition most executives receive an allocation of shares, which will, in most cases, vest over three years. The difficulty is, these packages do not compare well with what senior leaders earn in other markets such as the USA or indeed in PE backed businesses. Are we potentially looking at a dangerous drain of great leaders, away from UK FTSE?
Many new appointees to Remuneration Committees inherit, and are having to fix what has gone before, which has major impact on the senior management. Paul Wolstenholme from PwC recalled the case of a well-known listed retail group, who proposed to increase the package of their newly appointed female CFO so as to bring it in line with her predecessor and address the gender pay gap, only for the suggestion to be challenged by a very vocal shareholder.
With many businesses unable to secure the new 85% shareholder approval target to pass a package increase, we seem rather ‘stuck in limbo’ and anyone trying something new is guaranteed to be “in for a kicking”...
SO IS IT WORTH IT?
So are you prepared for the fight? With RemCo Chairs in the line of fire from all sides, is it worth the reputational risk? Annemarie Durbin, RemCo Chair at Santander, also pointed out here that, with an average fee of between £12k-£15k for a RemCo Chair, the rate is well below the minimum wage at a time when the onus on the appointment and the workload is ever increasing. Katy Bennett, Director, Reward at PwC, observed that RemCo Chairs are now expected to report on gender diversity and the gender pay gap and what to do about it; increasingly they are expected to impact and shape the structure of overall pay and all of this of course requires significant time.
Having said this, those who chair RemCos highlight the intellectually stimulating dimension of the role. Also, with pay and corporate culture closely intertwined, they highlight how the role today sits firmly at the heart of a company’s values, philosophy and behaviour.
DO YOU HAVE WHAT IT TAKES?
RemCo Chairs today need an array of skills to deliver this multi-facetted role: first of all transparency and independence of mind in fairly representing the interests of all stakeholders, combined with the traits of a conciliator and diplomat, as a ‘go between’ with executive and investors. Also, remuneration policies are complex, requiring strong attention to detail yet this has to be coupled with broad business understanding, financial nous and a feel for the big picture to ensure remuneration is totally aligned with the company’s strategy. Last but not least, the role today calls for robustness in dealing not only with demanding shareholders but also the sensational media and the hostile environment that can ensue. You do need emotional intelligence to deal with such an emotive subject, the ability to stand your ground and outstanding communication skills to put the story across in the right way.
- Make sure you do your due diligence and select your appointment carefully. Do your homework:
- Check out who you will be replacing as RemCo Chair; is there blood on the walls?
- How combative is the senior leadership team and management; are they at odds?
- How will the Chair of the Board work with the RemCo Chair?
- How strong are the HRD, Reward Director and Company Secretary?
- Without the right support the journey could be hard and you might find yourself doing all the heavy lifting.
- Save your blushes and find yourself a good remuneration advisor, independent from management.
- Consult both widely and early; consult both internally with finance, legal and PR teams and externally with your shareholders but also compliance heads and proxy agencies (ABI/ ISS).
- Find out how shareholders think and how their relationship with their internal compliance teams work.
- The target for shareholder approval has moved from 51% to 85%; a friendly shareholder register is the only way to engineer change.
- Balance your portfolio carefully; most RemCo Chairs comment that their mandates are expanding to include gender pay gap, workforce ratio, etc. so expect considerable time demands.
- Start thinking of succession early and conversely use your first year ‘introduction’ as best you can; being a member of RemCo for a year before accessing the RemCo Chair role is a great opportunity to get close to the business and gain a thorough understanding of its historical issues and strategic challenges
There is no single bullet and no right answer; introducing innovation and getting new packages voted on will continue to be challenging. Regulation by itself will not effect change; deciding the right pay level remains incredibly subjective. Perhaps we do need a remuneration association for RemCo Chairs, for best practice and to guide the design of remuneration policies which will produce the right outcome for all stakeholders. There has been much debate, for instance, about performance and what this means in different sectors. Annual targets probably give a better line of sight than a three year horizon but lower targets set over three years to lower expectations would also have major impact on shares. All this highlights how challenging the role has become but also how crucial and hugely influential it is on the culture and values which will shape a business and the future of our corporate governance.