As investor pressure on boards to reduce excessive pay and introduce greater transparency has increased, so too has the level of media scrutiny, with compensation packages frequently debated in the context of public fairness.
More still, tackling excessive executive compensation has become an enhanced area of focus for the current UK Government, adding another layer of complexity to defining appropriate levels of reward.
With a record number of protest votes cast, the 2016 AGM season highlighted the challenges of balancing the interests of executives with those of shareholders. The 2017 season is expected to be no different.
In this environment, many observers are beginning to set their sights on the remuneration committee chairs.
Who would be a remuneration chair? Not only are these individuals tasked with determining the structure and quantum of complex executive remuneration packages, they are also responsible for ensuring pay is both performance related and acceptable in the eyes of the public.
To better understand the individuals who are taking these key decisions, Russell Reynolds Associates examined the sectoral, functional and demographic backgrounds of remuneration committee chairs of FTSE 100 companies. Our research helps to shed light on the qualities and experiences that chairs of these committees share, but also points to potential changes in the role as it continues to evolve.
Remuneration Chair Diversity and Experience
WHAT IS THE GENDER BREAKDOWN OF FTSE 100 REMUNERATION CHAIRS?*
Proportionally, women are represented more strongly in the remuneration chair role than in any other committee chair role.
WHAT ARE THE EXECUTIVE BACKGROUNDS OF FTSE 100 REMUNERATION CHAIRS?
Almost one-third of FTSE 100 remuneration chairs derive from financial services, emphasising the demand for strong quantitative abilities in the role.
Despite the lack of professional services firms listed in the FTSE 100, 14% of remuneration chairs have backgrounds in this sector.
*Three remuneration chairs chair two FTSE 100 companies.
HOW MANY REMUNERATION CHAIRS WERE IN-SECTOR RECRUITS?
There is significant variation by industry when it comes to the match between remuneration chairs’ backgrounds and the sectors to which they’ve been recruited. Sector-specific experience appears not to be an across-the-board recruiting priority, even in the most regulated industries. This is surprising considering the nuances of each sector’s remuneration structures.
HOW MANY REMUNERATION CHAIRS WERE RECRUITED STRAIGHT INTO THE ROLE?
The number is high, particularly in the context of the recommended changes to the UK Corporate Governance Code by the Executive Remuneration Working Group*, the independent panel established in 2015 to address concerns over remuneration policy and executive pay.
The Group’s 2016 report recommends that:
Non-Executive Directors should serve on the remuneration committee for at least a year before taking over the chairmanship of the committee. The Financial Reporting Council should consider reflecting this best practice in the UK Corporate Governance Code.”
Tenure and Composition
DOES THE BOARD CHAIRMAN SIT ON THE REMUNERATION COMMITTEE?
The Executive Remuneration Working Group recommends that:
Boards should ensure the company chairman and whole board are appropriately engaged in the remuneration setting process. This will ensure that the decisions of the remuneration committee are agreed by the board as a whole”
Should 100% of chairs sit on the remuneration committee? In the spirit of transparency – and in an effort to ensure whole-board buy-in – it might be advantageous for the chairman of the board of directors to sit on the remuneration committee.
Predicted Changes to the Remuneration Chair Role
Shareholder management skills
Shareholder management skills will be an increasingly important quality in remuneration chairs, as they are required to explain or defend pay packages to shareholders more frequently.
Remuneration chair independence
As the number of shareholder votes against remuneration chairs increase, greater attention will be placed on the length of tenure served by remuneration chairs and their perceived independence.
Remuneration chairs will increasingly be required to play a mediating role between the executive committee and the shareholders. Balancing shareholders’ demands with the possibility that CEOs might “jump ship” if their remuneration packages are not satisfactory, demands a particular skillset.
Attractiveness of the role
As the remuneration chair is increasingly visible in the public domain, this will impact the attractiveness of the role, consequently making it more difficult to find top remuneration chair talent.
As remuneration policies are placed under increasing scrutiny by shareholders, the time commitment of the role will grow, as well as the role’s overall perceived eminence on the Board. This change calls into question whether the future remuneration chair will be able to hold other chair or SID responsibilities concurrently.
Long-term remuneration chair succession planning
As the demands placed on the remuneration chair increase, there may be a reduction in the number recruited directly into the role, particularly in light of the Working Group’s recommendations. Boards may be increasingly required to develop long-term succession plans to ensure there are internal step-up candidates to the role.