Executive Benchmarking - a union perspective on Remuneration Consultants
The recent guidance document issued by the Trade Union Share Ownership group, comprising the TUC, UNISON and Unite unions, had some interesting things to say about the use of Remuneration Consultants in relation to executive pay.
This is a particularly interesting area for me, as executive reward benchmarking is one of the services we at Paydata provide and I produce remuneration committee reports for a number of our customers. It is always fascinating to find out how others see your role and, in particular, how they think you should be operating. So, here is what they say and my own personal thoughts.
What the Trade Union Share Ownership group says about Remuneration Consultants
In their guidance document the union group states:
“We believe that the use of remuneration consultants has fuelled both the levels and complexity of executive pay. We believe that remuneration committees should take full responsibility for policy and implementation of executive remuneration themselves and should not rely on remuneration consultants to generate proposals.
“Where remuneration consultants are used, they should be employed directly by the remuneration committee and not by executive directors or any other employee of the company. There should be full disclosure of fees paid.
“We believe that in order to avoid conflicts of interest, remuneration consultants should not undertake any other consultancy work for the same company. Where this is not adhered to, it is essential that there is full disclosure of the value of the non-remuneration related work the consultants have carried out for the company. Where remuneration consultants are being paid more in non-remuneration work than for their work for on remuneration, we will oppose this using the binding vote on remuneration policy.”
Taking the blame
The strong inference is that as remuneration consultants we are, partially at least, responsible for what is wrong with executive pay. Indeed, they consider that we have been complicit in making executive reward too complex and presumably therefore, not sufficiently transparent. Personally, I would agree that complexity is not necessarily a positive, especially if it makes executive packages impenetrable and barely understandable. Frankly, our job, especially in relation to executive benchmarking, would be a lot easier if packages were considerably simpler.
Having said that, I do not really identify with the consultants they appear to be talking about. At Paydata we can certainly do some complicated and pretty darn smart things but ultimately, the results of the benchmarking analysis we undertake and the guidance we provide has to be readily understandable, accessible and clear. That’s just the way we work. If the unions can use their collective shareholdings to encourage others to do the same, so much the better.
Working with Remuneration Committees
Where I am wholly in agreement with the unions is on the need for remuneration committees to take full responsibility for executive reward. That is their raison d’être after all; their reason for existence. We are basically there to support the remuneration committee’s decision-making. We say as much in our remuneration committee reports:
“This report is intended to provide one input into the decision-making process. It should be used in conjunction with other information to reach a decision based on management judgement”.
As we also point out, benchmarking executive pay is not an exact science. If no judgement was required there would be no role for the remuneration committee.
Who pays the piper?
It is easy to see the point that remuneration consultants should be employed by the remuneration committee rather than by the very executives who are impacted by the consultant’s work. The inference is clear - if you “follow the money” the executives will make sure that their paid consultants give them the answers they want to hear.
Taking on board the point being made, I have to reconcile it with a situation we are frequently faced with. An executive, and it is usually the HR or Finance Director, has responsibility for sourcing remuneration advice on behalf of the organisation. For non-executive roles this usually includes everyone in their own team as well as the teams of their colleagues. Does HR always come out better than others as a consequence? Not in my experience. Frankly, our credibility would be at stake if we started doing that and in this business our reputation is a precious thing.
The same goes for executive roles generally. We have to be trusted in the advice we give and if we artificially over-egg things just to keep our paymaster happy I really do not think it would take a remuneration committee very long to spot what was going on. In my experience, we are just as likely to say that packages are too rich as we are to say they need boosting.
Transparency of fees
I must admit I am a little ambivalent on this point. Part of me feels that this information is commercially sensitive and anyway, it is something between us and our customer and as such should be confidential. On the other hand, I am not sure that I would mind the world knowing that we offer terrific value for money and frankly, the cost of our services is a very small drop in the ocean compared to the pay bill.
Avoiding a conflict of interest
This leads me on to the unions’ guidance relating to the use, or rather the non-use of remuneration consultants on other work; this just does not look sensible to me. The TUC guidance on not doing work on other things which is of a higher value than the work done on executive pay is, in my humble view, misplaced.
Again, I understand the point being made but my perspective is somewhat different. As I say, our reputation means a great deal to us. A large proportion of our work comes from referrals from satisfied customers. In many cases we work with those customers over many years on a number of different projects. In the course of doing so we develop a greater understanding of their business, we know their roles and can therefore assess their remuneration that much better. We also gain their trust.
It is frequently that trust which leads them to ask us to help them with their executive pay. Not because we are compliant or somehow willing conspirators in boosting their own pay packets. It is because we do a good job – nothing more, nothing less.
One last thing…
I know that I must sound very defensive. Forgive me. It is my reaction to being identified as part of the problem and not part of the solution. I really struggle to identify with the image that the TUC guidance is creating and I find it difficult not to take it personally.
There is much to commend in the TUC’s approach to executive remuneration. Whilst I do not agree with all of it, I respect their opinions and I understand what they are trying to do to address what are undoubtedly some cases where the previous approach has failed. But when it comes to remuneration consultants I feel obliged to try to at least present a more balanced view. That view is my own and I am sure others will see things differently.
But then again, I am an executive remuneration consultant…and you know what they are like!
A summary of the rest of the guidance in the TUC document is available here