Boards need to go further on remuneration rules

In a 12-page consultation paper, Directors’ Remuneration: Consultation Document, the FRC said it was “crucial” for effective corporate governance and investor stewardship that there is ongoing engagement between companies and their shareholders.

The paper pointed out that, for investors, the FRC’s Stewardship Code sets out how they should engage with companies over voting – for example, if they disagree with some remuneration proposals, they should set out their reasons why, and clearly.

However, it asked whether respondents to the consultation paper thought the code did not go far enough, and did not take into account the ongoing debate post-crisis over the levels of executive remuneration.

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It said: “Levels of remuneration should be sufficient to attract, retain and motivate directors of the quality required to run the company successfully, but a company should avoid paying more than is necessary for this purpose.”

The consultation recommended that “a significant proportion of executive directors’ remuneration should be structured so as to link rewards to corporate and individual performance”.

It also set out a supporting principle, that the performance-related elements of executive directors’ remuneration should be “stretching and designed to promote the long-term success of the company”.

The document added: “The remuneration committee should judge where to position their company relative to other companies. But they should use such comparisons with caution, in view of the risk of an upward ratchet of remuneration levels with no corresponding improvement in performance.

“They should also be sensitive to pay and employment conditions elsewhere in the group, especially when determining annual salary increases.”

Code provisions outlined in the FRC’s paper

The board should establish a remuneration committee of non-executive directors

The remuneration committee should have delegated responsibility for setting remuneration for all executive directors and the chairman, including pension rights and any compensation payments.

The committee should also recommend and monitor the level and structure of remuneration for senior management.

The board itself or, where required by the articles of association, the shareholders, should determine the remuneration of the non-executive directors within the limits set in the articles of association.

Shareholders should be invited specifically to approve all new long-term incentive schemes (as defined in the Listing Rules) and significant changes to existing schemes, save in the circumstances permitted by the Listing Rules.

Adviser view

James Gardiner, certified financial planner at London-based Westminster Wealth Management, said: “I appreciate directors of well-run companies should be rewarded accordingly, and although those rewards may seem excessive, I try to keep an open mind. But I still believe that companies should be very clear about how they are paid, and we can no longer have old-school golden handshakes between friends.”