IoD calls for tighter rules to tackle ‘rewards for failure’ in executive pay model

1 Mar 2018 By Marianne Calnan

Experts warn that Carillion scandal reveals senior reward model is ‘broken’ 

The Institute of Directors (IoD) has called for clearer rules on executive pay to bolster corporate governance in scandal-hit Britain, in a letter published this week seeking measures such as greater transparency by companies after share buy-backs.

In its 27 February written response to the Financial Reporting Council (FRC’s) consultation on proposed revisions to the UK’s corporate governance code, Dr Roger Barker, the IoD’s head of corporate governance, urged the regulator to bring in clearer criteria as to when bonuses can be clawed back for business failures. 

He said that the code should be more explicit about the circumstances in which clawback of executive bonuses should occur. As a minimum, clawback should be required in cases of gross misconduct, material accounting restatements and corporate insolvency.

It also suggested remuneration committees at large listed companies should have to report on whether businesses where board members have bought back the company’s shares have experienced a boost in executive pay packages – and the extent to which ‘executive remuneration outcomes’ arose due to share buyback.

Barker urged employers and remuneration experts to ensure executives have a “profound understanding of expectations in the delivery of good corporate governance – including the need to challenge and properly hold management accountable.”

He told People Management in an interview that “rewards for failure were detrimental to businesses.”

The company directors’ group also criticised the “frustrating” lack of focus given to professional development, or the “important role” training of directors could play in improving board-level behaviour and decision-making.

Stating that an effective system of corporate governance is ‘a key underpinning of UK economic performance and business legitimacy,’ it did however disagree with expanding the remuneration committee’s role in overseeing the entirety of workforce policies and practices. 

Although this was an important board-level topic, it suggested the code was “too prescriptive”. It also disagreed with the new recommendation that remuneration committee chairs should have minimum of 12 months’ experience of serving on such committees. 

The FRC, which regulates auditors, accountants and actuaries, sets the UK’s Corporate Governance and Stewardship Codes. 

The FRC’s long-awaited revisions of the code, published on 5 December 2017, proposed that companies will be required to consider workforce pay when setting executive salaries, and that companies with a premium listing of equity shares from their accounting periods beginning on or after 1 January 2019, must establish remuneration committees of at least three independent non-executive directors.

Its proposals, which were open to consultation until 28 February 2018, followed the government’s acknowledgement that remuneration committees had little incentive to consider the wages of the wider workforce in September 2017.

The issue of regulating executive pay and bonuses came to the fore again with the public collapse of British facilities management and construction services multinational, Carillion, on 15 January 2018. 

This was closely followed by the news that the company’s bosses were set to share £4m worth of bonuses. At the time, Barker attributed this partly to the relaxation of clawback conditions for executive bonuses in 2016, which “appears in retrospect to be highly inappropriate. It does no good for the reputation of UK business when top managers appear to benefit in spite of the collapse of the organisations that they are responsible for,” he said.  

Carillion’s former chief executive, Richard Howson, who stepped down following the company’s collapse, is also due to continue receiving his £660,000 per year salary and £28,000 in benefits until October 2018.

Stefan Stern, director of the High Pay Centre, said he supported the IoD’s amendments, but would take their proposals further because the “whole executive pay model is broken.”

Stern told People Management that the “truth is that so-called ‘performance-related’ pay doesn't really work for complicated and varied jobs like being a CEO.” 

Charles Cotton, performance and reward adviser at the CIPD, said that although employees expect bosses will be paid more to reflect their bigger roles, the amounts CEOs receive from their bonus and incentive schemes was “contentious.” 

“If we want to boost productivity and ensure CEO pay reflects contribution, we need a wider definition of what constitutes ‘success’ in terms of financial and non-financial measures, such as people,” Cotton told People Management. 

“In most organisations, success is collective achievement and so all employees – not just a few at the top – should enjoy the fruits of their labour,” he said. 

In a statement, the CIPD said that it believed in the importance of companies considering how their workforces create and add value, and that companies should reflect this in how they decide to invest in developing and rewarding their staff. 

In its response to the FRC’s proposals, the CIPD welcomed greater focus on employee voice, and 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.”

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