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.
Executive pay remains a topic of considerable debate in the UK. Investors, 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. Share option schemes are common, as are restricted share unit schemes. Service contracts for chief executives are also watched to ensure that payouts on departure do not exceed one year's remuneration. Shareholder votes against 'say on pay' resolutions have been rare: but are becoming increasingly common in the current economic climate when so-called "rewards for failure" are being heavily criticised.
Remuneration of senior executives has been 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, the Department for Business, Innovation & Skills (BIS) has recently proposed a number of changes to executive remuneration. The new Enterprise and Regulatory Reform Act 2013, which will come into effect on 1 October 2013, introduces a number of changes to the way that executive pay is disclosed and the input that shareholders have into the pay that company executives have. The 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).
Shareholders have sought to increase their power over remuneration through binding votes and these plans are currently before Parliament and, if approved, will be effective for periods ending on or after 30 September 2012. This plan will mean that there must be a binding shareholder vote every three years on each listed company’s remuneration policy.
As a result of the above, the remuneration committee is being made more accountable to shareholders for directors’ remuneration.
Remuneration committee guidance
- FRC to consult on executive remuneration (press release) - October 2013
- FRC consultation document: Directors' Remuneration - October 2013
Deloitte publications / discussion
- Governance in brief: FRC consultation on directors' remuneration - October 2013
- FRC publishes consultation on executive remuneration - October 2013
- Directors' Remuneration (discussion) - September 2013
- Listing Rules: Changes to remuneration disclosure requirements (discussion) - August 2013
- Governance in brief: Directors' remuneration report - new regulations laid (for NEDs) - June 2013
- Need to Know - New directors' remuneration report regulations laid before parliament - June 2013
- The new remuneration report: Disclosure regulations - June 2013
- Approval of narrative reporting and directors' remuneration regulations - April 2013