Helpful QCA remuneration guidance raises some interesting points
January 25, 2021
Last month, the QCA published its updated guidance for remuneration committees. The guidance is well-written and contains useful guidance for small and medium-sized companies, with helpful examples. It also indicates a tougher regulatory regime for AIM companies.
The guidance starts by defining an effective remuneration committee in the following terms: “Effective Remuneration Committees ensure both remuneration policy and practice promote, encourage and drive efficient long-term growth of shareholder value in line with the board’s strategy and policies on succession and on risk. This will also take account of the company’s environmental, social and governance (ESG) responsibilities.” So, therein lie the contents of the kitchen sink.
But analysis of that opening statement reveals that it does, in fact, include the key issues on which today’s remuneration committees will be judged, at least by investors. The challenges are not insignificant and the QCA guidance recognises that all remuneration committees should have access to independent advice. All companies, including those on AIM, should publish in their remuneration reports details of their advisers, fees paid and services provided.
In addition, the guidance includes references to those matters we have all come to recognise as the key matters with which remuneration committees should be concerned, for example:
- the need for simplicity when designing remuneration policy
- the links between remuneration policy, business strategy and culture
- remuneration in the wider workforce
- the need for shareholder engagement (making the point that private shareholders in growth companies are an important source of liquidity and engagement with them is an opportunity for the company to promote itself).
Pointers towards increasing levels of disclosure for AIM companies include:
- an expectation that larger AIM companies should report on remuneration as if they were main-market quoted companies
- a statement encouraging all companies to put their remuneration policies to a shareholder vote
- whilst falling short of requiring the same rate of pension provision for directors and the wider workforce, a statement that decisions to provide differential rates should be taken with care and justified.
The guidance impliedly challenges the standard mix in executive directors’ packages of salary, bonus and LTI but does not offer an alternative. However, it recognises the current difficulties in setting long-term performance targets and makes reference to restricted share plans, without giving them wholehearted support, consistent with the ambivalent attitude towards such plans shown by institutional investors.
Two points in the guidance are particularly interesting.
First, it recommends that remuneration policy should be reviewed every three years, which is not controversial, but when reviewing policy, remuneration committees should take account of the profile of the executive team, the stage they have reached in their careers and their ownership interests.
We do not agree with the last point. An executive’s status as a shareholder is separate from his or her status as an employee and, as a result executive remuneration policy should not be confused with ownership.
Secondly, remuneration committees and nominations committees are urged to work together in connection with succession planning for all directors and senior managers.
We agree with this. Management succession is fundamental to the continued success and sustainability of businesses and we think there is a strong case for remuneration committees and nominations committees to be combined.
To discuss any points arising from this article or for more information, please contact Paul Norris.