Council of Institutional Investors

Eye on International U.K. Group Outlines Recommendations for New Approach to Executive Compensation
Thursday, July 28, 2016
by: Glenn Davis

Section: CII Governance Alert

Lamenting  a “complicated system with many examples of poor correlation between company performance and remuneration outcomes,” an ad hoc working group created in 2015 by the U.K.’s Investment Association on July 26 released its final report

The group, which consists of representatives from two U.K. asset managers, one U.K. asset owner and two U.K. public companies, was chaired by Nigel Wilson, head of Legal & General.  Also serving on the group was Helena Morrissey of Newton Investment Management. 

The report singles out the growing complexity of executive pay as a key contributor to its misalignment and distills its call to action down to the following 10 recommendations:
  • Compensation committees should have greater flexibility to select pay structures most appropriate to the company’s strategy and business needs
  • Non-executive directors should be prohibited from becoming chair of the compensation committee until they have served on the committee for at least a year
  • Boards should ensure the chair and full board are involved in the remuneration process
  • Compensation committees should exercise independent judgment and not overly rely on consultants—particularly during engagements with shareholders. (As part of this recommendation, the group recommends that the committees regularly put out for bids the contracts for their compensation advisers.)
  • Shareholder engagement should focus on the strategic rationale for compensation and involve both investment and governance perspectives 
  • The consultation process should be aimed at understanding investors’ views and not be initiated with the expectation that it will lead to investor support
  • Compensation committees should disclose the process for setting bonus targets and retrospectively disclose the performance range
  • Companies should provide investors with clear disclosure on the use of board discretion, as well as its impact on remuneration outcomes
  • Using both external and internal comparisons, boards should explain why the chosen maximum pay level is appropriate for the company.
  • Compensation committees and consultants should guard against the potential inflationary impact of market data
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