The Remuneration Committee

All listed companies are required to have a remuneration committee, comprised of non-executive directors, who are responsible for setting appropriate levels of remuneration for directors.

Remuneration committee role and responsibilities

The remuneration committee’s role is to ensure that remuneration arrangements support the strategic aims of the business and enable the recruitment, motivation and retention of senior executives while complying with the requirements of regulatory and governance bodies, satisfying the expectations of shareholders and remaining consistent with the expectations of the wider employee population.

The Code states that remuneration should be sufficient to attract, retain, and motivate directors of the quality required to run the company successfully, but a company should avoid paying more than is necessary for this purpose. In addition, a significant proportion of executive directors’ remuneration should be structured so as to link rewards to corporate and individual performance.

Remuneration committees should ensure that the compensation paid to executives is fair and reasonable and linked to the long-term strategy and success of the business.

Other considerations

Executive pay remains a topic of considerable debate in the UK Investors and investor bodies, led by the Association of British Insurers (ABI) and National Association of Pension Funds (NAPF), keep close watch on pay schemes that exceed accepted norms. Service contracts, exit payments and recruitment policies for executive directors are also under increasing scrutiny.  Since the 'say on pay' advisory vote came into force in 2002 there have been few instances of a remuneration report receiving less than 50% of votes in favour, however, the proportion of shareholders abstaining or voting against has been increasing and in recent years shareholders have undoubtedly been more prepared to mount a strong challenge to companies where they feel the remuneration arrangements may be detrimental to the health of the business.

Remuneration of senior executives has been and continues to be a widely debated topic in the United Kingdom. Demands from various quarters have been made to limit bonuses and other compensation.

As a result of the focus on this topic, changes have recently been made to the disclosure of executive remuneration.   The new Enterprise and Regulatory Reform Act 2013, which will come into effect on 1 October 2013, introduces new shareholder voting powers and a number of changes to the way that executive pay is disclosed.  

Companies are now required to publish a remuneration report which includes three sections: a statement from the chairman of the remuneration committee covering key decisions and changes made to remuneration in the year, a forward looking remuneration policy report and an annual report on remuneration which includes both how the policy has been implemented in the year under review and how it will be implemented in the forthcoming year.  Shareholders now have a binding vote on the policy report at least every three years, or whenever any changes are made in addition to an annual advisory vote on the annual remuneration report.

Payments cannot be made to directors which are outside an approved policy.  Once the binding policy is in force all future remuneration and loss of office payments must be consistent with it and all directors are liable if the company breaches the policy.

Another key change is that the total remuneration of individual executive members will now be disclosed as a single figure in the financial statements (including base pay, bonuses, dividend equivalents, pensions etc).

As a result of the above, the remuneration committee is being made more accountable to shareholders for directors’ remuneration.