New rules mean firms must consider wider workforce when setting executive pay

5 Dec 2017 By Greg Pitcher

FRC proposals welcomed for empowering HR, but concerns are raised over backtrack on formal pay ratios

Public companies will have to consider workforce pay when setting executive salaries under plans revealed by the Financial Reporting Council (FRC) today.

The corporate governance regulator set out proposed measures under a revised UK Corporate Governance Code to encourage listed firms to consider rank-and-file staff when setting pay levels for directors.

The long-awaited potential revisions to the code come after the government this summer noted that remuneration committees had little incentive to consider the wages of the wider workforce.

The plans were welcomed as an important step in increasing the importance of people practices inside businesses, and potentially elevating the role of the HR profession. But there was disappointment at the lack of firmer measures to enforce pay ratios and draw greater attention to shareholder disquiet over executive pay.

The proposals published by the FRC, which are open to consultation until 28 February 2018, recommend that all companies with a premium listing of equity shares, from their accounting periods beginning on or after 1 January 2019, establish a remuneration committee of at least three independent non-executive directors.

“The remuneration committee should… oversee remuneration and workforce policies and practices, taking these into account when setting the policy for director remuneration,” said the consultation document.

A description of the work of the remuneration committee in listed firms’ annual reports should include “an explanation of the company’s approach to investing in, developing and rewarding the workforce, and what engagement with the workforce has taken place to explain how executive remuneration aligns with wider company policy”.

It did not, however, follow up on the the government’s announcement in August of far more wide-ranging plans to curb high-level executive pay, promising a “world-leading package” to enhance the public's trust in business following a series of remuneration revolts and other controversies over spiralling salaries.

This was to involve new laws to “force all listed companies to reveal the pay ratio between bosses and workers” – which has not materialised.

Business secretary Greg Clark had promised that all listed companies with significant shareholder opposition to executive pay packages would have their names published on a new public register, and new measures would seek to ensure employee voice was heard in the boardroom. The idea that “for the first time listed companies will have to publish pay ratios between chief executives and their average UK worker under government reforms to boardroom accountability” is omitted from the new paper.

The FRC is scheduled to publish a revised version next year, which it expects will apply to most companies by 2019.

FRC chairman Sir Win Bischoff said the revisions were particularly important as the UK exited the EU, when “a revised code will be essential to restoring trust in business, attracting investment and ensuring the long-term success of companies for members and wider society”.

CIPD chief executive Peter Cheese welcomed the fact that the proposals placed a greater focus on the voice of employees. The CIPD strongly supported the proposal “to broaden the role of the remuneration committee to oversee pay and incentives across the wider workforce rather than just focusing on executive pay”, he said.

“This is an important step in encouraging businesses to be more active in capturing and acting on their people data, and for boards and the remuneration committee to improve their understanding and oversight of people data.”

Cheese added that such a move “will require fundamentally changing the role and make-up of the remuneration committee to ensure it has the right levels of expertise and necessary time and support to carry out its expanded remit”.

CIPD performance and reward adviser Charles Cotton noted that FTSE 100 CEO remuneration fell by 17 per cent in the financial year to April 2016. “We hope that these proposals will encourage both employers and investors to reflect on what is being rewarded, why, how and when – not just for those at the top, but across the whole workforce,” he said.

Carolyn Fairbairn, director-general of employer body the CBI, said the measures suggested by the FRC would create better-run companies.

But Peter Finding, associate in the employment team at law firm Withers, put the proposals in the context of wider market approaches to remuneration. “The FRC's recommendations do not look revolutionary, in the context of both recent shareholder revolts on executive pay and the requirements already imposed on financial services firms under the FCA and PRA remuneration codes [which in some situations require bonuses to be able to be clawed back up to 10 years after they've been awarded],” he said.

Business, energy and industrial strategy committee chair Rachel Reeves MP agreed that it was right to focus on pay decisions, but went further, saying: “Companies must be made to publish and explain huge differences in pay levels between executives and workers, and set out the steps they are taking to tackle the gender pay gap, when detailed figures are published next year.”

The proposals also include measures to require companies to include details of the gender balance among senior managers – defined as those reporting directly to the board – in their annual reports, as well as responding more directly when they encounter significant shareholder opposition to executive pay policies and awards. Appointments to boards and other succession planning should be “based on merit” and should promote diversity under the new code.

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