While boards attract much attention, especially in times of crisis, their constituent committees remain largely unnoticed (except audit committees when something goes wrong with the accounts). That could change with recommendations from a think tank that the humble remuneration committee (remco) take on a much greater role.
The High Pay Centre has undertaken research and published recommendations that include boards considering transforming their remcos into “people and culture” committees that would work to ensure their executive pay settlements match their strategy for people management and corporate culture.
The move directly links executive pay to culture, which aligns with the view of many politicians, investors and corporate governance experts who increasingly see the management of corporate culture as a critical element in the long-term sustainability of companies.
A broader perspective
Luke Hildyard, executive director at the High Pay Centre, says the research is about shifting remcos from the “narrow focus on the topic of executive pay” to think more broadly about the role remuneration plays across the company.
“Pay is both an intrinsic function of, and driver of, culture,” he says. In short, if there’s a committee of influential board directors looking at pay issues, they should be looking at its role more broadly.
A people and culture committee would look at non-financial performance, succession planning and the development of long-term executive capability. It would also examine the “organisational fairness” of pay decisions.
The High Pay Centre also called for more people management experts to join remcos, as well as representatives from stakeholders, including workers. Long-term incentive plans for execs should be “replaced as the default model” in favour of a “less complex” system based on basic salary supplemented by incentive schemes designed to reward long-term success with “much smaller restricted” share awards.
Focus on culture
The High Pay Centre’s report is the latest example of pay being linked to culture. When State Street Global Advisors published a letter at the beginning of this year stressing its interest in the alignment of corporate culture with strategy, its advice pointed to best practice that included monitoring factors such as “pay differences” among employees “across divisions and job functions”.
Other advisers have emphasised the use of executive pay and pay levels as proxies for corporate culture.
State Street took the opportunity to provide boards with a template showing how culture might be gauged inside a company. That could prove a useful tool. When Board Agenda and Mazars polled senior managers across Europe, the survey found that boards struggle with culture. The research, at the end of 2017, found that 63% of respondents either work on boards that exclude culture from formal risk considerations, or fail to routinely assess the risk associated with their corporate cultures.
While interest in culture and people may be growing in some quarters, some directors suggest that boards are less interested than the current business media coverage might suggest. One portfolio director told Board Agenda that only one of their boards “had any interest in the actual treatment of people. Others couldn’t care less.”
What some non-executives advocate for is having a range of measures to hand that “demonstrate a company’s culture on the ground”. This might include detailed charts showing pay ranges with numbers in each category, including CEOs and chairs, plus people on minimum and living wage. They also want to see activity such as redundancies and new hires in the year split by salary group, absentee rates and, if relevant, strike data.
The government has moved on some issues. Companies are now required to publish information on gender pay differences and will shortly have to reveal CEO–employee pay comparisons. The new governance code calls on boards to have some form of worker representation and places more importance on corporate purpose and values.
What the code did not do, however, was formalise which part of the board is responsible for aligning culture and pay levels. The High Pay Centre proposals would place that responsibility on the agenda of remcos. That might require some adjustment to company constitutions or committee terms of reference. That’s not impossible, but it would mean going beyond the scope of the current corporate governance code, something most companies are likely to find challenging, at least in the immediate term.