By Stephen Cahill, remuneration partner, Deloitte

Stephen Cahill, partner in the remuneration team at Deloitte responds to the publication of the High Pay Commission’s report into executive pay, welcoming its focus on enhancing accountability and transparency, before cautioning the possible effects of complete openness regarding pay.

“The remuneration paid to the top executives of the largest UK companies has increased significantly over the past decade. In our opinion, this raises some legitimate questions about whether, in all cases, the performance of the company justifies these increases.

“Significant simplification along the lines suggested in the report (with remuneration comprising of base pay and a single variable component) would support efforts to improve simplicity and transparency, but we would question whether this is a justifiable end in itself. The increased use of performance-related pay has been largely an investor-led trend over a number of years. An incentive framework that provides a sensible balance between short-term and long-term strategic objectives is an important mechanism for ensuring executive pay is aligned with shareholder interests and can be justified by company performance. Removing those links could prompt a marked shift towards a short-term focus, which would be unhelpful.

“In terms of improving transparency and accountability, we are supportive of a more standardised approach to the reporting of remuneration, including clearer disclosure about the strategic aims of the company and how remuneration arrangements support these. Also, clearer details of the purpose of each element of the package, how the performance targets used in the incentive arrangements link to company strategy, and better information on the degree to which performance measures are met and consequently how the payouts from incentive plans are determined.

“We would, however, sound a note of caution regarding the unintended consequences of greater disclosure: there is a very real danger that increased disclosure can contribute to pay ‘ratcheting’, because availability of data fuels internal and external comparisons. We also have concerns about the validity or helpfulness of a single ‘total’ remuneration number, because each company is likely to take a different view on the value of any variable component.

“In addition, we share concerns about whether the remuneration arrangements are always properly considered within the context of the wider employee workforce. While we are not in favour of committee members who are not full board members, as he or she would not have the necessary information to enable remuneration to be considered in context, we do believe the remuneration committee should be more aware of the views of employees on remuneration issues. This could be achieved by regular reports submitted to the committee providing information on the pay and conditions applying to employees, and the employees’ views on these. We would support the introduction of a ‘fair pay report’ which highlights the principles the committee adheres to when determining executive remuneration and how this fits within the context of pay across the company.

“However, while a measure of how pay at the top relates to median employee pay, and particularly how this changes over time, may be a helpful piece of information for the committee to consider, we are not in favour of this information being disclosed as we consider it could be misleading and inflammatory, particularly where comparisons might be made between companies.

“Finally, we agree it may be appropriate to require more disclosure on the remuneration consultants, although we note it is already a requirement of the Directors’ Remuneration Report Regulations to disclose the nature of the services provided by any external advisers to the committee. In our opinion, the most important point is remuneration committees need to be satisfied there are no conflicts of interest, remuneration consultants are providing good quality, independent advice and the committee should ensure they employ consultants who have committed to the code of conduct in relation to executive remuneration consulting.

“As far as disclosure is concerned, we believe it would be helpful for companies to disclose, for each consultant, a summary of the services provided and the process by which the appointment was made and to make a statement that the advisers have complied with the code of conduct and that the committee is satisfied the remuneration consultants have provided objective and independent advice. It may also be helpful to include information relating to how many of the committee meetings the advisers were invited to attend and whether the chairman held meetings with the advisers without the executives being present.”

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