Reforming Remuneration

Reforming Remuneration

The CIPD is calling for company boards to re-model their RemCos to become new People and Culture Committees (PACCs). 

Friday 4 January 2019 was “Fat Cat” Friday; a day when the UK’s top bosses made more than a typical full-time worker would earn in an entire year, according to calculations from independent think tank the High Pay Centre and the CIPD.

Over the coming year, the CIPD and High Pay Centre will be calling for boards, shareholders and policy makers to make changes. HR teams can expect to see greater demand for their insights and expertise and senior people professionals will see more opportunities to have a voice at the boardroom table following New research published by the CIPD and the High Pay Centre shining a spotlight on the need for a greater understanding of the role of people and culture in building successful, sustainable businesses.

The figures

The average (median) full-time worker in the UK earns a gross annual salary of £29,574. “Fat Cat” Friday recognises that in 2019 the average FTSE 100 CEO, on an average (median) pay packet of £3.9 million, only needs to work until 1pm on Friday 4 January 2019 to earn the same amount.

The £3.9 million figure was calculated by the CIPD and the High Pay Centre in their 2018 analysis  of top pay and it marks an 11% increase on the £3.5 million figure reported in their 2017 analysis. The pay increase means that FTSE 100 CEOs, working an average 12-hour day, will only need to work for 29 hours in 2019 to earn the average worker’s annual salary, two hours fewer than in 2018.

Remuneration Committee Reform

The CIPD and High Pay Centre report, RemCo reform: Governing successful organisations identifies the shortcomings of the remuneration committees (RemCos) charged with setting executive pay and calls for them to be significantly reformed. In particular, it highlights: 

  • The myth of ‘super talent’ as a factor that continues to drive excessive pay with one remuneration committee chair commenting: “It’s nuts… and nuts has become the benchmark”. 
  • How there needs to be much greater diversity among those responsible for setting CEO pay, both in terms of their ethnicity and gender, for example, but also their professional backgrounds and expertise in order to combat ‘group think’
  • How current pay mechanisms contribute to the problem of high pay.

In response, the CIPD and High Pay Centre recommend replacing long-term incentive plans (LTIP’s) as the default model for executive remuneration with a less complex system based on a basic salary and a much smaller restricted share award. This would simplify the process of setting executive pay and ensure that pay is more closely aligned to executive performance. 

The CIPD and High Pay Centre are calling for RemCos to ensure that CEO pay is aligned more appropriately to rewards across the wider workforce and that their contribution is measured on both financial and non-financial measures of performance. This should include measures such as employee well-being and investment in workforce training and development – all of which are crucial for good corporate governance.

Executive pay needs simplifying

Simplification of executive pay could also allow more time for the committees to focus on other issues that are critical to wider corporate governance and also interact with pay and reward, such as corporate culture, good people management and sustainable performance driven by positive purpose. To reflect this wider remit, the CIPD and High Pay Centre suggest both refocusing and renaming remuneration committees so they become People and Culture Committees (PACCs).

Peter Cheese, chief executive of the CIPD, comments: 

“There is still far too great a gap between top earners and the rest of the workforce. Average pay has stagnated whilst top CEO reward has grown, despite overall slow economic growth and very variable business performance. Excessive pay packages awarded by remuneration committees represent a significant failure in corporate governance and perpetuate the idea of a ‘superstar’ business leader when business is a collective endeavor and reward should be shared more fairly. This imbalance does nothing to help heal the many social and economic divides facing the country. 

Stakeholders of all kinds, including many shareholders, are looking for significant shifts in corporate cultures and behaviours. Evolving the RemCo to become a broader people and culture committee would help boards focus on and gain deeper understanding of the organisational, cultural, and people aspects of their business, and the opportunities and risks they pose. By better reflecting the value, contribution, diversity and well-being of our workforces in corporate governance and reporting, we can help restore trust in business and drive better business outcomes for everyone.”

Luke Hildyard, Director of the High Pay Centre, said: “Excessive executive pay represents a massive corporate governance failure and is a barrier to a fairer economy. Corporate boards are too willing to spend millions on top executives without any real justification, while the wider workforce is treated as a cost to be minimised. To raise living standards, we need growth and innovation, but also to ensure that growth is fairly distributed. CEO pay packages 133 times the size of the average UK worker suggest we could do a lot better in this respect.”

Charles Cotton, Performance and Reward Adviser at the CIPD writes ‘The CIPD believes that transparency on all these issues is key to ensuring that work is a force for good that benefits everyone, not just shareholders. While recommendations are aimed primarily at the boards of large, publically listed companies, the principles are just as applicable to organisations of any size’

Increased emphasis on company purpose and values

The refocused and potentially renamed RemCo would act as a champion for the importance of culture at board level, an issue which has been highlighted in revisions to the UK Corporate Governance Code. In addition to new executive pay transparency measures, the updated Code, effective from 1 January 2019, places an increased emphasis on company purpose and values as drivers of corporate governance. Some of the key responsibilities that the CIPD and High Pay Centre recommend for the PACC include:

  • Evaluating the impact of the company’s reward practices throughout the organisation, ensuring that sustainable performance, including societal and environmental impact, are included as key considerations in deciding remuneration and award. For example, by examining whether pay and benefits are aligned with the company’s purpose; whether they incentivise appropriate behaviours and performance; and whether differences in pay and reward levels from top to bottom are fair and proportionate.
  • Responsibility for setting, monitoring and reviewing remuneration and compensation payments for executive directors, chairman and board members, as well as overseeing succession planning and the development of long-term executive capability within the organisation.
  • Drawing on reliable and up-to-date information from HR teams about workforce demographics and changes, people management practices and organisational culture in order to ensure that company culture and the well-being of the workforce are consistent with the long-term strategy and purpose.
  • Setting out strategic objectives in relation to organisational culture and people management, designed to ensure the long-term success and sustainability of the company as well as ensuring that the long-term well-being and development of the workforce and organisation forms an integral part of business strategy

The High Pay Centre is an independent think-tank set up to
examine corporate governance and pay at the top of the income
distribution carrying out research aimed at developing a better
understanding of top rewards, company accountability and business
performance. www.highpaycentre.org
Find the methodology and regional variations here
View the CIPD Press Release