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Executive rewards: Paying for success – an update

Executive rewards: Paying for success – an update

The Government’s response to the BEIS committee’s report on executive reward has been published.

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chris-barnes

Partner – People Services, Reward

KPMG in the UK

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The Business, Energy and Industrial Strategy (BEIS) committee has published the Government’s response to its recent report: ‘Executive rewards: paying for success’. The report considered whether or not recent changes made to UK corporate governance concerning executive pay, had gone far enough and made a number of recommendations for further reform.

BEIS committee’s key recommendations

In its report, the BEIS Committee made the following key recommendations:

  • The Financial Reporting Council (FRC), or a new regulator, should
    • Clarify and strengthen its guidance on executive remuneration;
    • Monitor how remuneration reports and better reporting against CA 2006, section 172 meet the aims of increased transparency and alignment of pay with objectives; 
    • Monitor compliance with the UK Corporate Governance Code with a view to making an assessment of which method of employee engagement proves most effective and recommending changes;
  • Companies required to appoint at least one employee representative to the remuneration committee;
  • CEO pay ratio reporting requirements expanded to include all employers with over 250 employees;
  • Executive pay structures simplified;
  • Greater use of schemes designed to share profits more evenly; and
  • Remuneration Committees should set, publish and explain an absolute cap on total remuneration for executives in any year.  

The Government’s response

The Government considered the BEIS committee’s recommendations for further change as ‘a useful contribution to the continuing public debate on high levels of executive reward’.

However, the Government’s ‘immediate priority was to focus on the effective implementation and assessment of the recent reforms’, which would first be fully reported on by companies in 2020.

Accordingly, the Government has no immediate plans to make further changes to the reporting and disclosure of executive pay.

In particular, the Government rejected calls to require:

  • An employee representative on the remuneration committee;
  • An absolute cap on executive director pay; and
  • CEO pay reporting to be extended to all companies (not just quoted companies) with 250 or more employees.

Furthermore, in respect of enforcement of the revised disclosure and reporting obligations, particularly under CA 2006, section 172 and around employee engagement, the Government stated it would consider further action and reform unless there is clear evidence of companies taking active steps to respond to significant shareholder concerns about executive pay outcomes.

In reply, the BEIS committee stated that the Government’s response ‘represents a missed opportunity to rein in bosses’ pay and link CEO pay to that of the rest of their workforce’ and, in particular, that ‘it’s disappointing the Government has chosen to reject our recommendation that workers should sit on company pay committees’.

KPMG comment

Executive pay remains in the cross-hairs of the public, politicians, policy makers and investors alike.

However, companies still have a great deal of flexibility in how to structure and determine pay. If this level of flexibility is to remain, and trust is to be restored in big business, it is important that Remuneration Committees continue to engage in meaningful dialogue with their shareholders and stakeholders (in particular, employees) and carefully consider their interests alongside the long-term strategic goals and performance of the company, particularly when making any determination or setting any policy around pay.

Remuneration Committees should then ensure there is full disclosure and reporting around these areas.

Going forward, there are two key areas for action.

Firstly, Remuneration Committees should consider how best to ‘future proof’ existing pay arrangements and policies to ensure that, in exceptional circumstances, they have sufficient discretion and power to clawback and override formulaic outcomes.

Secondly, closer attention should be paid to how companies are engaging with their employees and how they are being offered the opportunity to share in future success through all-employee and profit sharing schemes, such as the UK SAYE Share Option Scheme or Share Incentive Plan.

This can be a complex area. However, with the right professional advice Remuneration Committees should be able to steer a clear path through the revised corporate governance regime.

KPMG’s Reward Consulting practice regularly advises clients on a wide range of remuneration issues including policy design, pay benchmarking and shareholder consultation exercises. If you have any queries, please get in touch with your normal contact or e-mail employersclub@kpmg.co.uk.

© 2020 KPMG LLP a UK limited liability partnership and a member firm of the KPMG global organisation of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved.

For more detail about the structure of the KPMG global organisation please visit https://home.kpmg/governance.

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