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Focus on executive pay: House of Commons Business, Energy and Industrial Strategy Committee Report

  • United Kingdom
  • Corporate

02-04-2019

The House of Commons Business, Energy and Industrial Strategy (“BEIS”) Committee has published a report, Executive rewards: paying for success.

The report forms part of BEIS’ scrutiny of corporate governance following the review of gender pay gap reporting in 2018. It looks at progress towards addressing the gap between the pay of chief executives on the one hand, and company performance and employee pay on the other. The report looks at some of the recent trends and developments in executive pay, highlighting recent examples of large awards and shareholder revolts, such as Persimmon, Unilever and Royal Mail.

Matters covered by the report

The Committee comments on some of the recent corporate governance reforms, such as the provisions in the revised UK Corporate Governance Code regarding remuneration and employee representation, noting that there was a move away from the initial support for worker representation on boards and that the revised UK Corporate Governance Code instead gives three options (a workforce appointed director, a formal workforce advisory panel or a designated non-executive director). In the absence of mandatory employee board representation, the Committee notes that the presence of an employee on the remuneration committee would be a useful alternative, and this is one of the key recommendations made in the report.

The Committee also expresses its view that the new pay ratio reporting requirements that will apply to quoted companies (under the Companies (Miscellaneous Reporting) Regulations 2018) should apply to all organisations with more than 250 employees. The report also comments on  the revised Stewardship Code that is currently subject to consultation, the public register of dissent maintained by the Investment Association and the Wates Corporate Governance Principles for large private companies. The Committee notes that whilst these reforms were welcome developments, in general, they do not go far enough towards addressing its concerns around executive pay.

The report also notes the independent review of the use of share buy backs commissioned by the Government in January 2018, and calls for this to be published without further delay.

BEIS Committee Recommendations

BEIS concludes that the structure of executive pay has become too heavily dominated by incentive-based elements, and does not effectively drive decision making that is in the long-term interests of the company. The key recommendations made in the report include:

  • a simpler and more transparent pay structure based on a fixed term salary plus deferred shares vesting over a long period of time
  • a much reduced element of variable pay, which is aligned to the wider social responsibilities of the company. Bonuses should be shared more evenly throughout the workforce and recognise wider goals than financial performance
  • a much stronger link between executive and employee pay, for example by making greater use of profit-sharing schemes. This would be strengthened by having an employee representative on the remuneration committee (see below)
  • pay ratio reporting requirements be expanded to include all organisations with over 250 employees (ie not just quoted companies) and include a requirement to publish the ratio between CEO and the lowest pay band, as well as the bottom quartile. In addition, both companies and partnerships should be required to report pay ratios in the 2019 annual report
  • companies should be required to appoint at least one employee representative to the remuneration committee to ensure that there is a full discussion of the link between executive pay and that of the workforce as a whole
  • the Committee welcomes the announcement by the Investment Association in February 2019 that it will monitor and flag companies that pay pension contributions to new directors that are not aligned to the majority of the workforce. It recommends that the new regulator to replace the Financial Reporting Council (“FRC”) seek public explanations from any company that fails to deliver alignment on pension contributions
  • remuneration committees to set, publish and explain an absolute cap on total remuneration for executives in any year; and the new regulator should be more prescriptive, interventionist and prepared to publicly call out poor practice

In addition, BEIS welcomes the replacement of the FRC, but recommends that the new body should have stronger powers and be more pro-active, including:

  • clarifying and strengthening its guidance on executive remuneration, with a view to exerting significant downward pressure to avoid unjustifiable payments and to be able to recover them if made
  • monitoring the impact of the corporate governance principles for private companies and examining the case for greater disclosure around remuneration
  • developing guidelines to ensure that bonuses are a reward only for exceptional performance
  • more effective sanctions attaching to the Investment Association’s register of opposition votes
  • seeking public explanations from any company that fails to deliver alignment between executives and employees on pensions contributions


Next steps

Corporate governance in the UK continues to go through a period of reform. The above proposals, whilst far reaching, constitute the recommendations of the BEIS Committee at this stage. It remains to be seen how the Government will respond to the report, and which of the recommendations it may decide to take forward.

Useful Links

House of Commons BEIS Committee report – Executive rewards: paying for success

Press release

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