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Article | Executive Pay Memo North America

U.K.’s BEIS report on CEO pay reinforces growing worldwide attention to pay for performance

Compensation Strategy & Design|Executive Compensation
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By Jessica Norton and Anne-Sophie Blouin | April 3, 2019

The growing worldwide attention given to the pay gap that exists between employees and CEOs and the need to tie pay to performance was reinforced with the publication of a strongly worded U.K. report on executive pay on March 26 prepared by a select committee of the U.K. Parliament’s House of Commons.

"Executive rewards: paying for success,” was developed by the Business, Energy and Industrial Strategy (BEIS) Committee. Among other points, it recommends:

  • A much greater involvement of the new regulator that will replace the Financial Reporting Council (FRC).
  • The new regulator should require public explanations from companies that do not align directors' pensions with the workforce, develop guidelines on bonuses to ensure that they only reward for exceptional performance, monitor companies' disclosure on section 172 of the Companies Act and compliance with the Corporate Governance Code and explore potential sanctions for companies that do not respond to significant dissent.
  • Greater involvement of asset managers and proxy advisors.
  • Companies should appoint at least one employee representative to the remuneration committee.
  • Reporting requirements on pay ratios should be expanded to include all employers with over 250 employees and that data on the lowest pay band also be disclosed.
  • Executive pay should be simplified, more definitively promote companies' long-term objectives, and link more closely to that of the workforce as a whole. BEIS favors a simple structure based on a fixed basic salary plus deferred shares that vest over a long period and are subject to clawback. BEIS encourages the use of profit sharing or other plans designed to share profits more equitably with employees. Over time, the proportion of variable pay should be reduced substantially and the increased certainty associated with a reduction in total remuneration.
  • Remuneration committees should set, publish and explain an absolute cap on total remuneration for executives in any year.

The report follows an earlier report published by BEIS, “Gender Pay Gap in 2018.” Each report addresses a component of what the committee was tasked to investigate:

  • Companies' compliance with gender pay gap reporting requirements and steps taken to address the gap.
  • The implementation of the recommendations on executive pay by the previous Committee in its 2017 report and the effectiveness of Remuneration Committees and institutional investors in combating excessive executive pay.
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