Brexit: Board Members and A New View of Executive Pay

Political will for change

There is deep concern in the UK Government that Brexit will make the country less competitive. One area that the Government has singled out for attention is executive pay.

UK Prime Minister Theresa May has repeatedly criticised the growing gap between rewards for top executives and those for ordinary workers.

Writing in the London newspaper The Daily Mail on 27 August, May took business leaders to task once again: “Some business leaders have ignored the concerns of their shareholders by awarding pay rises to bosses that far outstrip the company’s performance. The view of investors – large and small – on executive pay should be taken seriously.”

Profound inequality

The average chief executive of a company listed on the FTSE 100, the country’s benchmark stock index, made 129 times as much as a regular employee last year, according to the UK Chartered Institute of Personnel and Development (CIPD). That was up from 45 times as much 20 years ago.

“The increase in the share of wealth of the top 1% is a major policy challenge for this century and one that capitalism must carefully address. High CEO pay is increasingly a fulcrum for discontent over widening income distribution; it is seen as insufficiently connected to performance. It threatens the implicit social contract under which society functions, which assumes that the system we work within is inherently fair,” wrote London-based think-tank The High Pay Centre, in a recent report.

In its 29 August statement, the Government announced three key measures to control executive pay better.

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First, the Government will introduce secondary legislation requiring quoted companies to publish annually the ratio of CEO pay to the average pay of their UK workforce. It is currently proposed that the ratio will compare total remuneration as per the Directors’ Remuneration Report to the lowest level of pay at a given company. A narrative explaining the year-on-year changes to the ratio should also be published.

Then, the Investment Association will keep a register of all companies where 20 per cent of shareholders or more have voted against executive pay rises.

Finally, remunerations committees will be expected to play a larger role in both setting levels of pay, and in communicating pay policy across all stakeholders in an organisation.

There has been a change of heart by the government as regards ‘say on pay.’ Shareholders in the UK already have a binding vote on executive pay every three years. The Government had initially planned to change that to an annual vote, but decided that the measure would create much inefficiency.

Role of the board of directors

UK Directors must be prepared to justify executive pay policy, and the remuneration committee chair is expected to act as a spokesperson for that policy across the organisation, and in communicating with stakeholders.

A study by the UK offices of PricewaterhouseCoopers and law firm Cleary Gottlieb proposed specific steps for directors who will be meeting with investors and other stakeholders. The board should:

  • Agree on the agenda with the participants.
  • Review what information it is acceptable to discuss.
  • Define directors’ roles in the engagement, which is to represent the board.
  • Prepare directors to demonstrate knowledge of the executive compensation package, the behaviors it is designed to promote and any elements that might be controversial.
  • Brief the directors on the background of the investors, including its voting policies and voting history with the company.
  • Advise directors on the roles of the investor representatives, whether they trade the company’s stock, vote the proxies, etc.

Disclosure should be based on making clear comparisons between executive pay for the UK and that of workers based here. Companies with international operations should be careful to distinguish UK executive pay from that of other regions.

“We would encourage companies to disclose: their FTE figures alongside their headcount numbers, and include a breakdown by region of both FTEs and staff costs so a comparison of UK-only pay ratios can be made,” the CIPD pointed out.

Directors should be able to explain ‘What we do’ and ‘What we don’t do,’ to explicitly address important pay practices (such as tying pay to performance) and highlight the lack of potentially controversial pay features or perks (such as tax gross-ups on perquisites or personal use of corporate aircraft).

When determining ratios between most- and least-paid, employee figures for contractors as well as permanent staff should be considered, for a deeper understanding of the true size of the business. Such pay ratios can include the ratio from the highest- to the lowest-paid employee, pay ratios between management tiers as well as the ratio between the pay for the CEO and that of the median worker,” the CIPD counseled.

A graph should be produced showing the skew of a company’s income distribution over time. This will make clear if income distribution is becoming more evenly distributed or not.

Directors should also plan to disclose how they plan to invest in, lead and manage their workforce for the long term.

Role of the board portal

Directors who must communicate with stakeholders and workers about executive remuneration need to be properly briefed. For example, when engaging with shareholders about executive compensation, directors need to be careful not to communicate material non-public information selectively to those shareholders.

This kind of sensitive briefing requires the ability to communicate among board members with the assurance of rapidity and security.

There is no better way to make that assurance than with Diligent’s board portal. Diligent offers the highest grade of security, and information used on the portal can be made access-restricted, so that only those who have a right to share it are able to do so. Viewing and signing documents becomes a snap. Vote on agenda items and share notes with colleagues as easily as possible.

Further, rapid high-quality communication is enabled, and updates to materials like board books or notes from a general counsel can be made in real time.

Some portals provide solutions to improve governance and efficiency. Diligent offers apps with governance-focused features that can help your board collaborate productively and securely. Having an app that allows board committee collaboration outside of full board meetings also frees up more in-person time for strategic work.

All of this is oriented by UK law and practice. Improve the efficiency and security of your board-level communications by contacting Diligent here.

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