Fat Cat Pay
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Executive remuneration remains a pressing topic for a wide range of stakeholders. The intensity of noise we are hearing tells us that many people continue to feel that executive pay is simply too high.

We attended the Remuneration Seminar hosted last month by the IR Society and featuring Stephen Cahill, Vice Chairman of Deloitte. He posed some interesting questions about investor engagement on the issue such as ‘why does a company like Blackrock, one of the largest investors in the world, only talk to companies once a year about remuneration when it is potentially the most brand-damaging issue a company could face?’. As we have seen with last year’s ‘shareholder spring revolt’, fat cat pay is set to return to the top of the agenda and generate ink in the media, framing many companies in a bad light.

Our view on the topic is that executive pay does need reform and trust does need to be rebuilt. The revised UK Corporate Governance Code will address some of these issues but, as Mr. Cahill asked during the seminar, will the reforms work? Or will they work to the detriment of UK listed companies which will then become less attractive for executives than companies in other countries? The better option it would seem is to encourage long-termism and structure pay to provide the highest rewards for sustainable long-term performance. We think the noise surrounding executive pay is a good thing. With executives able to earn life-changing sums within only a few years of employment, there should be greater transparency on how they’re paid, what they did to earn it and how it impacts other stakeholders. In other words, performance-based remuneration as opposed to position or title-based remuneration.

One way to enhance transparency and rebuild trust around executive pay is through the annual report. Our key findings from a recent research report show that the annual report is still regarded by investors as the primary source of information about a company. The remuneration report is the most widely read section of a company’s annual report. However, companies often miss the opportunity to demonstrate how they have engaged with their shareholders to determine appropriate pay packages for directors and offer clear explanations of the rationale behind the policies they put in place. More often than not, the remuneration report is cluttered with boilerplate jargon and inscrutable legalese.

There should be a concise overview of the year from the Remuneration Committee Chairman and the focus should be on activities and actions the committee has taken during the year, rather than rolling policies. There should also be evidence that the committee is mindful of directors’ remuneration and how it is linked with corporate strategy and financial performance, e.g. through links to strategic priorities and KPIs.

Below, we have set out some tips on how companies could better communicate the alignment of pay for performance and demonstrate more accountability on the part of Remuneration Committees.

Small steps in rebuilding trust:

  • Use the Remuneration Chairman's letter to explain any changes to remuneration policy or pay packages; include a clear outline of policy changes with a summary chart
  • Discuss shareholder engagement on remuneration and the key issues raised during the year
  • Include a calendar and overview of meetings, activities and actions discussed by the Remuneration Committee during the year
  • Explain how remuneration is linked to long-term strategic and non-financial metrics
  • Include a discussion of the KPIs, financial and non-financial, used to assess annual performance linked to executive remuneration
  • Include additional graphs, charts and tables to make the report more accessible

These are small steps companies could take in the wake of impending reforms, but they could be vital in restoring confidence in a system many deem as broken. While the government, FRC and the newly formed ‘Executive Remuneration Working Group’ are busy prescribing detailed diets for the fat cats, management could help themselves now through better communication. In the meantime, we’ll just have to wait and see if the reforms succeed in making these fat cats leaner.

For more information, please contact Kay KayachithInvestor Communications Adviser, MerchantCantos.