Summary

On 5 April 2017, the Department for Business, Energy & Industrial Strategy Committee published its report on Corporate Governance Reform. The report sought views on whether the UK’s corporate governance framework provides the right structures to assist business with making high-quality decisions for the long term and how good behaviour may be embedded in business.

Key Recommendations

In respect of pay, and in response to the “shifting sands of opinion about fairness of rewards”, the report recommends the following: –

• Companies should make it their policy to align bonuses with broader corporate responsibilities and company objectives and take steps to ensure that they are genuinely stretching. Policy in this respect should be considered by the Financial Reporting Council (“FRC”) in their corporate governance rating system which will publicise good and bad corporate governance practice examples and require companies to publish reference to the rating in their annual reports.

• Long-term Incentive Plans (“LTIPs”) should be phased out as soon as possible with no new LTIPs being agreed from the start of 2018 and existing agreements not being renewed.

• The FRC should consult with stakeholders with a view to amending the Code to establish deferred stock rather than LTIPs as best practice in terms of incentivising long-term decision making. The consultation should develop guidelines for the structure of executive pay with the following features: – (1) a simpler structure based primarily on salary plus long-term equity, to divest over a genuinely “long-term” period, normally at least five years, without large steps; (2) limited use of short-term performance-related cash bonuses, which should be aligned, where possible, to wider company objectives or corporate governance responsibilities; and (3) clear criteria for bonuses: they should be genuinely stretching and be aimed to provide incentives rather than just reward.

• The FRC should revise the UK Corporate Governance Code (the “Code”) to include a requirement for a binding vote on executive pay awards the following year in the event of there being a vote against such a vote of over 25 per cent of votes cast. This requirement should also be included in legislation at the next opportunity.

• Employee representation on remuneration committees should be included in the Code and leading companies should be expected to adopt this approach.

• Any Chair of a remuneration committee should normally have served on the committee for at least one year previously. To further incentivise strong engagement, we recommend that the Chair of a remuneration committee be expected to resign if their proposals do not receive the backing of 75 per cent of voting shareholders.

• Companies should set out clearly their people policy, including the rationale for the employment model used, their overall approach to investing in and rewarding employees at all levels throughout the company, as well as reporting clearly on remuneration levels on a consistent basis. The FRC should consult with relevant bodies to work up guidance on implementing this recommendation for inclusion in the Code.

• The FRC should work with other relevant stakeholders to amend the Code to require the publication of pay ratios between the CEO and both senior executives and all UK employees. Additionally, the Government should require that equivalent pay ratios be published by public sector and third sector bodies above a specified size.

Pett, Franklin & Co. LLP are experts in employee share schemes, share valuations and executive incentives. To find out how we can help you or your client, please call 0121 281 5798 or email enquiries@pettfranklin.com.