After weeks of media headlines criticising FTSE 100 executive remuneration, the Investment Association have finally pulled their rabbit from the hat! The nattily entitled “Executive Remuneration Working Group” set up last year under the auspices of the Investment Association (see our previous blog post) has published its Interim Report (which can be downloaded from the link in the first line of the IA press release). This no doubt explains why, given all the media attention on executive pay over the last few weeks, we have not been seeing the IA quoted alongside other interested parties such as PIRC and ISS.
The Working Group will be hosting round table discussions involving interested parties before producing their final report this summer. The report will be used to inform a revision of the IA’s “Principles of Remuneration”, which have been very influential over the years (most notably when they were maintained by the Association of British Insurers).
The report is short and to the point and well worth a read. Essentially, they are looking to fix an executive remuneration system that they feel is no longer “fit for purpose”. Their proposal is for companies to abandon a “one size fits all” approach (which companies may have otherwise been attracted to, looking for safety in numbers). Instead, they want remuneration committees to propose simplified remuneration structures that fit the needs of their companies. If you are now asking yourself whether it is possible to go for a bespoke solution and simplify at the same time, the answer is “yes” – but only once you have freed yourself from the tried and tested salary/benefits/bonus/LTIP formula. The Interim Report provides some thoughts on how that might work and asks for other suggestions.
The Working Group has been prepared to contemplate solutions that few remuneration committees would have been brave enough to propose on their own, including structures that will give more predictable outcomes and which may vary less with swings in corporate performance. They have also attempted to look at the potential knock-on effects to ensure that the overall quantum of executive remuneration is acceptable – this is a very important point because in the past significant changes in the design of executive pay packages have tended to fuel the seemingly relentless rise in the amounts that FTSE 100 executives take home.
Clearly, this is a development that is likely to impact remuneration in the longer term, starting with new policies put forward for shareholder approval next year. In the meantime, shareholders are reliant on expressing their dissatisfaction through their AGM votes on remuneration reports.