HR still under-represented on remuneration committees, say experts

6 Feb 2019 By Robert Jeffery

Panel at CIPD event argues for end to long-term incentive plans and new pay ratios as solutions to soaring executive pay

HR professionals must be better represented on remuneration committees if soaring executive pay, which has caused widespread mistrust in business, is to be effectively restrained, an expert panel has suggested.

At an event run jointly by the CIPD and the High Pay Centre, speakers argued for a greater voice for HR professionals on the committees that set pay strategies, demanded a reining in of long-term incentive plans (LTIPs) for executives and mulled the possibility of legislation.

Luke Hildyard, executive director of the High Pay Centre, said there were far more people from marketing backgrounds than HR professionals serving on remuneration committees. “When you think about the insights that people from HR could bring in terms of reward and motivation, that seems to be remiss,” he said. “The HR perspective is missing in RemCos.”

The event was convened to complement the recent RemCo Reform report from the CIPD, which argued for RemCos to evolve into broader people and culture committees that would oversee pay across the organisation and set it in the context of genuine performance and business value.

The average FTSE 100 CEO is now paid £3.92m a year, according to the report, a figure which rose 11 per cent in the last 12 months, way above the increase enjoyed by the workforce as a whole.

This led the panel to urge decisive action. Rebecca Long-Bailey, shadow business secretary, told the event: “Time and again, we hear about record-breaking pay packets for so-called fat cat bosses. We have the slowest wage growth among G20 countries, but that hasn’t been the case for executive pay at the very top and that’s not fair.

“The prime minister has said it’s not anti-business to suggest big business needs to change [on remuneration]. For once, I agree with her.”

Long-Bailey said Labour would use legislation to rein in the problem, limiting the maximum pay ratio in the public sector to 20:1 between the highest and lowest paid, and introducing the same pay ratio as a condition for organisations bidding for public-sector work. She also pledged an executive pay levy on the largest private companies and broader reform of the corporate governance system.

Meanwhile, Iain Wright – director of corporate and regional engagement at accounting body ICAEW and former chair of the parliamentary business select committee – said executive pay had become “like a virility symbol, a statement of a company’s ambition.”

“That leads to a ratcheting effect,” he added. “Everybody wants to be in the top quartile for pay. The RemCo should be saying ‘how much do we need to be paying to attract the best, while also being mindful of our responsibility to the company, to other staff and to society in general?’ The majority of KPIs are non-financial and that’s not reflected in the way the RemCo reports.”

The use of LTIPs came in for considerable criticism, not least after scrutiny of pay at FTSE 100 housebuilder Persimmon, which planned a £75m bonus for its CEO Jeff Fairburn last year. Wright likened the prevalence of LTIPs to a “hot air balloon” that had not been effectively tethered.

And Sandy Pepper, professor of management practice at the London School of Economics, said: “There is a huge amount of evidence that LTIPs don’t work and are a huge contributory factor to inflation in executive pay. The cost of an LTIP is greater than the value placed on it by a senior executive, which is the exact opposite of what companies are trying to do. They are value destroyers.”

He suggested businesses should focus on rewarding executives through salaries and cash bonuses, and should be required to demonstrate how these align with the broader interests of shareholders and other stakeholder groups.

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