Brexit effect on executive benchmarking in the UK?

14 September 2017
Executive Reward

Debate continues over how much the UK may have to pay to leave the EU and the impact of Brexit on the UK’s HR landscape. Speculation over the ‘divorce bill’ projects the figure as high as £92 billion. Extricating itself from the EU is a complex process accompanied by a period of economic uncertainty that the government aims to resolve by March 2019, when the UK will officially leave the EU. Our UK Reward Management Survey Spring 2017 observed that Brexit had resulted in cautious long-term planning and pay rewards. We highlighted it was essential that during this transition period, reward arrangements continue to support retention and recruitment and deliver business strategy. Here we examine the potential effects of Brexit on executive pay which is becoming increasingly scrutinised.

Planning executive remuneration remains a key concern for shareholders during a period which presents numerous potential risks and opportunities for businesses. Increased market volatility leads to greater focus on performance-linked executive plans. Setting incentives for the coming year as Brexit negotiations unfold will be challenging. Businesses may be struggling to set long-term targets in an uncertain future trading environment. Therefore, the definition of success for executives and shareholders needs to be flexible and realistic to manage an uncertain time.

Our UK Reward Management Spring Survey noted that bonuses reflect seniority and the current ongoing focus of shareholders is the link between pay outcomes and corporate performance. Whilst the single market and customs union is being replaced with a new UK-EU trade framework, companies need to consider the impact of market volatility (including exchange rate movements) on performance conditions in annual and long-term incentive plans. The uncertainty also may be affecting the ability of companies to meet their current performance targets. Remuneration committees will need to take into account the overall performance of the business and circumstances outside the control of executives, whilst being mindful of the shareholders’ experiences. Some may be experiencing loss, but the weakening of the sterling may be beneficial to diverse international businesses with a UK presence. Ongoing dialogue with shareholders about the decisions made and their rationale will be key to maintaining shareholder support.

However, it is not just shareholders who are holding executive pay to account. The government is backing this scrutiny. Since the decision to leave the EU, pay awards have been steady, but for executive pay it continues to increase. The government’s manifesto promised a general clamp down on executive pay to tackle the income gap, where the average CEO of a FTSE 100 company earned £4.5m in contrast to the average UK worker’s salary of £28,000. The government have pledged to introduce a new register of companies managed by the Investment Association whose investors are unhappy with executive pay levels. They will name and shame companies where over 20 per cent of investors believe bosses are paid too much. Laws to force companies to publish and explain the ratio between pay of highest earner and average UK employee are being considered.

Being publicly transparent about the alignment between pay and performance is a powerful driver of consumer trust. In the wake of the UK’s decision to leave the EU, a senior fund manager was critical of the divisions that unaccountable pay structures create in society, saying that “Fund managers are waking up to the fact that they work for pension funds and the man on the street”. Hans-Christoph Hirt, Co-Head of Hermes EOS argued that pay packages should be fair and necessary to motivate executives, not a question of an acceptable maximum. Similarly, when there was backlash at the intended level of executive pay for BP’s CEO Mr Dudley, BP reduced the package by 40 per cent. BP was prompted to review its pay policy after a shareholder majority voted down a proposed 20 per cent increase in Mr Dudley’s remuneration, as the company had experienced its largest annual loss for over 20 years.

One sector which has been heavily regulated by the EU is the financial services sector. In the wake of the 2008 economic crisis, the EU attempted to restrain the risk-taking culture that it held responsible for the economic damage. The EU introduced a package of reforms to strengthen corporate governance in the sector where remuneration policies had rewarded bankers taking risks in exchange for potentially huge bonus payments. These measures called CRD IV introduced new leverage ratios, liquidity requirements and sanctions. Fundamentally, they capped bankers’ bonus pay, intending to remove the reward for risk.

It will be interesting to see if this regulatory regime will apply post-Brexit at all. In 2014, when these reforms were introduced, the Chancellor of the Exchequer George Osborne threatened legal action to oppose them, arguing that the cap would increase bankers’ fixed pay which is guaranteed even where banks have performed badly. Variable bonus pay would be subject to claw back arrangements and withheld by the banks if employees did something wrong or underperformed. Osborne argued that a cap may lead to a disregard for performance levels and guaranteed high levels of remuneration, making sanctions harder to impose. However, the Advocate General of the ECJ advised against these legal proceedings and the UK has complied with the banking regulations since. Post-Brexit, whilst banks may be given free rein to pay unlimited bonuses, this may bring the UK in line with New York, Singapore and Hong Kong. If policies are properly drafted, UK bankers could be encouraged to operate in even more innovative ways in a global environment though this will undoubtedly raise further public concern. It will be interesting to see how Brexit negotiations will play out and the reactions of businesses globally. In the meantime, when approaching how to structure executive pay packages and ensure that the best talent is retained and appropriately rewarded, it is important for remuneration structures to remain resilient, adaptable and flexible to business needs. If you would like to know more about executive benchmarking, please get in touch. The autumn edition of our reward survey is now open as we continue to capture the views of business around the UK. Participants will receive a free copy of the UK Reward Management Survey results in November.

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