Executive Reward - where advice ends and responsibility starts
In recent weeks the so called “shareholder spring” has seen an increasing number of shareholders either voting against the Remuneration Committee report or indeed the reappointment of directors themselves. But who has been party to the decisions made about the design of executive reward schemes and the absolute levels of reward they deliver? Arguably, three parties have had a part to play – the Remuneration committee, the Committee's professional advisor and, ironically, the shareholders themselves.
Ultimately, the responsibility rests with the Remuneration Committee. The Committee is appointed by the Board to act as an independent decision-making body with the expertise to analyse the evidence and determine the most appropriate reward arrangements. While no-one doubts either integrity or intent, the two key words here are ‘independent’ and ‘expertise’; arguably, on one or both counts, Committees may fail to deliver. They may not be truly independent because directors are ultimately drawn from a limited pool of people. On the other hand, they may lack expertise because their professional training is in a discipline other than reward management or finance.
Therefore, the Remuneration Committee relies heavily on input from their professional advisers. For FTSE companies this is, in the main, a small number of large Reward Consultancies. The Consultants will protest that their responsibility is to provide the information and the Remuneration Committee must decide what is best for the business and the shareholders. Largely, this is true. However, it ignores the responsibility that reward consultants have to provide context to the facts that they present; and, where factual information is provided, to ensure it is relevant to the specific business and/or executive’s circumstances, not just a formulaic “if company ‘a’ and ‘b’ pay ‘x’ then this is the market rate.”
Finally, shareholders themselves have a role to play. It was, after all, shareholder pressure that led to the development of longer-term reward programmes based on equity. It was shareholder pressure that drove measures such as earnings per share and total shareholder return to the fore, arguably to the detriment of a more balanced view of what constitutes good business performance. It was shareholder pressure that switched the balance of reward away from base salary and towards variable compensation related to the delivery of results. However, shareholders, like football supporters, are a fickle bunch; all behind the manager when the team is winning and calling for heads to roll when things do not turn out quite as planned.