The High Pay Commission (HPC) has today published its final report, “Cheques With Balances: why tackling high pay is in the national interest” (the Report). The HPC was established by the pressure group Compass (“Direction for the Democratic Left”) with the support of the Joseph Rowntree Charitable Trust. The HPC describes itself as “an independent inquiry into high pay and boardroom pay across the public and private sectors in the UK”. The background of the HPC Commissioners can be seen here and the HPC “Expert Panel” is here.
Perhaps the most eye-catching of the HPC recommendations is its call for “all companies to publish an anonymised list of their top ten highest paid employees outside the boardroom”. In the Report, this recommendation is restricted to companies that “comply or explain” with the UK Corporate Governance Code (the Code) – that is, to companies with a Premium Listing within the UKLA Listing Regime.
One little-reported finding of the HPC is that there appears to be little statistical evidence to support the argument that top executive pay must be escalate to stop talent from being poached:
“Our own evidence shows that global mobility is limited, with only one successful FTSE 100 chief executive officer poached in five years – and even this person was poached by a British company.”
An ambiguity throughout the Report is the extent to which the recommendations apply to AIM companies. Several recommendations are predicated on compliance with the Code, which is not an AIM requirement (most AIM companies tending instead to follow the Quoted Companies Alliance Corporate Governance Guidelines for Smaller Companies). It is fair to say that the Report has been written principally with FTSE 100 companies, or the FTSE 350 universe, in mind – AIM companies do not appear to have been on the HPC’s radar.
The HPC Recommendations
After each of the HPC recommendations below, we have attempted to note the constituency to whom the recommendation is addressed.
“1 Pay basic salaries to company executives
The High Pay Commission believes pay packages have become increasingly complex, damaging relations with shareholders, creating misperceptions and encouraging confusion and obfuscation. We therefore call for executive pay to return to first principles. We recommend executives should be paid a basic salary, with remuneration committees electing to award one additional performance-related element only where it is absolutely necessary.”
The reference to “remuneration committees” indicates that this recommendation applies to companies that “comply or explain” with the Code. The HPC suggests that the recommendation be implemented through the Code, with legislation to be used “if this is not taken up as normal practice across the FTSE”. It is consequently unclear whether this recommendation is intended to apply to AIM companies (although many AIM companies do have remuneration committees in accordance with the QCA Guidelines).
“2 Publish the top ten executive pay packages outside the boardroom
The High Pay Commission believes that lack of transparency in pay directly below board level hides both the impact of ballooning top pay on other executives and its link to performance. We therefore call on all companies to publish an anonymised list of their top ten highest paid employees outside the boardroom.”
Again, this recommendation appears to apply only to companies that “comply or explain” with the Code, with the HPC suggesting that the change should be implemented by legislation if not followed by companies. As above, it is unclear whether the recommendation applies to AIM companies.
“3 Standardise remuneration reports
The High Pay Commission has found remuneration reports to be complex, making pay packages and awards opaque and unclear for shareholders and the public. We recommend that remuneration reports should be presented in a standardised format, incorporating and moving beyond best practice. As part of this we recommend that all companies publish a figure for the total remuneration package received by each executive and a methodology for how it has been calculated.”
The Companies Act 2006 remuneration report requirements only applies to quoted companies, so this recommendation appears to apply only to companies admitted to the Official List, and not to AIM companies. The HPC suggests that the Financial Reporting Council should design this standardised report, with implementation through spreading of best practice or through the Code.
“4 Require fund managers and investors to disclose how they vote on remuneration
The High Pay Commission acknowledges that, while the current model allows shareholder absolute oversight of the executive through voting rights at the annual general meeting, some investment fund managers fully disclose how they vote on corporate governance while other only disclose this information to clients. We therefore call on all investments fund managers to fully disclose how they vote on all issues including those of remuneration.”
Recommendation applies to “investment fund managers”, undefined.
“5 Include employee representation on remuneration committees
The High Pay Commission has found remuneration committees to be a closed shop, made up largely of current and recently retired executives. This model has failed, leading to spiralling pay. We believe that greater engagement with employees may help restrain executive pay and help mitigate negative impacts on morale as well as encourage a greater engagement with the workforce. We therefore call for employees to be represented on remuneration committees as a first step to better engagement and accountability.”
The recommendation refers to remuneration committees, so applies to companies that “comply or explain” with the UK Corporate Governance Code. As above, it is unclear whether the recommendation applies to AIM companies.
“6 All publicly listed companies should publish a distribution statement
The High Pay Commission has found that many shareholders have a low level of engagement on issues of executive pay. It is important now to encourage greater engagement through improved disclosure, which takes greater account of the company context. We therefore recommend that all publicly listed companies publish annually a statement of the distribution of income over a period of three years, importantly showing percentage changes in: • total staff costs • company reinvestment • shareholder dividends • executive team total package • tax paid.”
It is not clear whether the reference to “all publicly listed companies” applies to AIM and PLUS companies. The Report implies not, as it suggests implementation via the Code.
“7 Shareholders should cast forward-looking advisory votes on remuneration reports
The High Pay Commission has considered recommending making shareholders’ advisory votes on remuneration reports binding, but it was felt that a preferred option at this stage would be to make the vote forward looking. We therefore recommend that shareholder votes on remuneration are cast on remuneration arrangements for three years following the date of the vote and that these arrangements include future salary increases, bonus packages and all hidden benefits, giving shareholders a genuine say in the remuneration of executives.”
The Companies Act 2006 remuneration report requirement only applies to quoted companies, so this recommendation appears to apply only to companies admitted to the Official List, and not to AIM companies.
“8 Improve investment in the talent pipeline
The High Pay Commission has found that the growing trend in hiring from outside the company is having an escalatory effect on executive pay. We recognise that seamless succession is not only important to company performance, but has a positive limiting effect on pay. We therefore recommend that companies implement a defined and structured talent pipeline to ensure suitable and qualified successors are promoted from within the company where possible.”
The scope of the recommendation is unclear but plainly intended to apply to larger companies.
“9 Advertise non-executive positions publicly
The High Pay Commission recognises that the makeup of non-executive directors, who determine executive pay deals, may have an inflationary effect on pay. Even looked at positively, these non- executives are drawn from a relatively small pool of individuals. We believe the recruitment of non-executives should be openly advertised, making remuneration committees open to a wider group, encouraging diversity and ending the closed shop culture of appointments.”
The recommendation presumably only applies to listed (and the larger private and some regulated smaller) companies, as only these companies will have non-executive directors.
“10 Reduce conflicts of interest of remuneration consultants
The High Pay Commission has found that, despite codes of conduct, remuneration consultants are found to cross sell services to companies, giving them a direct conflict of interests. This may be having an inflationary effect on pay. We therefore recommend, in the first instance, that companies publish the extent and nature of all the services provided by remuneration consultants, acknowledging this is only the first step if cross selling is seen to continue.”
This recommendation only applies to larger public and private companies who use remuneration consultants.
“11 All publicly listed companies should produce fair pay reports
The High Pay Commission believes that it is essential that the pay gap between highest paid and the company median should be open to scrutiny, including how the ratios of highest to median pay has changed over a three-year period. If companies produce a fair pay report it will allow them to state their principles in relation to pay, encouraging pay to be considered across the company when setting executive pay, as is required by the UK Corporate Governance Code. We recommend that all publicly listed companies should publish fair pay reports as part of their remuneration reports to build trust in pay policies.”
Again, it is not clear whether the reference to “all publicly listed companies” applies to AIM and PLUS companies – the reference to the UK Corporate Governance Code suggests not. The HPC states that it be necessary to use legislation to implement this recommendation.
“12 Establish a permanent body to monitor high pay
Our investigations have found that escalating high pay is having a negative impact on company performance, the wider economy and trust in business. We have been shocked at the limited information available to the public, the consequent lack of informed public debate and the deep sense of unfairness that this lack of openness engenders. We recommend that a permanent body be established on a social partnership basis, much like the Low Pay Commission by government to: • monitor pay trends at the top of the income distribution • police pay codes in UK companies • ensure company legislation is effective in ensuring transparency, accountability and fairness in pay at the top of British companies • report annually to government and the public on high pay.”
This recommendation is aimed at the UK Government.
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