Political and economic instability creates challenges and pressure on remuneration committees to exercise discretion

Smokescreen

FTSE 100 remuneration committees are striving to find acceptable remuneration structures to compete with their US counterparts. Articles abound of increased FTSE 100 CEO pay and new, hybrid executive incentives. But for the vast majority of UK listed companies, this is a smokescreen.

That said, all companies must be competitive and this applies also to their remuneration policies and structures. Remuneration Committees must be able to implement remuneration policies that are right for their business.

75% of FTSE 100 revenues are generated overseas. In the FTSE 250, this drops to about 50%. Many UK-listed companies trade internationally but most are not engaged in a so-called international war for talent with US firms.

Challenges for Remuneration Committees

Noise about FTSE 100 firms’ need to compete with the US risks creating a ‘me too’ wave among executives in sub-FTSE 100 firms. Remuneration committees with good communication skills, operating in a boardroom culture of confidence, respect and trust, should be able to deal with this. It is, however, distracting.

A second, more taxing challenge, is how to implement remuneration policy in times, like the present, of political and economic instability. At such times, equity-based incentives might not produce desired results, adding pressure on remuneration committees to exercise (upward) discretion.

In unstable times, there are likely to be more occasions on which the exercise of discretion is appropriate. Often, however, committees are wary of exercising this important tool. Investors are likely to react strongly if they perceive upward discretion shields executives from downside risk but is not justified by performance.

Engagement is key to meeting the challenges

In unstable times, engagement becomes more important.

Clarity between remuneration committee and executives about remuneration policy implementation, including the use of discretion, is essential. The discussion becomes much easier in a boardroom culture of confidence, respect and trust.

Engagement with investors becomes even more important. The principle of ‘comply or explain’, underpinning UK corporate governance, opens the door for and requires engagement for success. Yet it seems neither fully understood nor embraced.

The exercise of remuneration committee discretion is an issue for which investor engagement is essential. It is in the interests of both issuers and investors that business is competitive and succeeds even in unstable times. What’s needed is an open mind from investors and a cogent narrative from remuneration committees.

Through our executive remuneration and human capital advisory services, MM&K assists clients to address the issues raised in this article. For more information, please contact paul.norris@mm-k.com in the first instance.

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