Remuneration committee: employee representation will not be mandatory

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Government has responded to the recommendations of the BEIS Committee in relation to executive pay.

On 13 June 2019, the Business, Energy and Industrial Strategy Committee (the BEIS Committee) published Government’s response to the recommendations contained in its report entitled “Executive Rewards: paying for success”.

In general, Government describes the BEIS Committee’s recommendations as a useful contribution to the continuing public debate on high levels of executive reward. It points to a series of recent and ongoing reforms, including the introduction of pay ratio reporting requirements, amendments to the UK Corporate Governance Code (the Code) and the replacement of the Financial Reporting Council with a new regulator called the Audit, Reporting and Governance Authority (ARGA), and states that its priority is to focus on the effective implementation of these reforms before considering significant further changes.

In relation to section 172 of the Companies Act 2006 and the Code respectively:

  • the BEIS Committee recommended that ARGA should monitor how remuneration reports and reporting against section 172 meet the aims of increased transparency and alignment of pay with objectives. Government confirms that this is its expectation also, as part of the new regulator’s expanded and strengthened corporate reporting review function; and
  • the BEIS Committee recommended that ARGA should monitor companies’ compliance with the Code with a view to making an assessment of which method of engagement with employees proves most effective and recommend changes. In its response, Government stresses that the effectiveness of individual engagement techniques is a matter for companies and their shareholders to assess.

Of particular note, Government rejected the BEIS Committee’s recommendations that:

  • employees should sit on remuneration committees – while Government is aware that several companies are already considering inviting an employee representative to attend at least one meeting of the remuneration committee each year, the huge variety of UK companies and group structures mean one method will not suit all;
  • pay ratio reporting should be expanded to include all employers with over 250 employees – Government notes that the introduction of a pay ratio reporting for quoted companies was a significant reform and it intends to monitor the impact of this new requirement when reporting first begins next year before considering any potential extension; and
  • remuneration committees should set, publish and explain an absolute cap on total remuneration for executives in any year – Government believes that it is for those committees and shareholders to decide whether executive pay policies should set an absolute cap on total remuneration with the shareholders having a say through the binding vote on executive pay policies which is required at least every three years.

WM Comment

The BEIS Committee has called Government’s response a missed opportunity. However many directors may be relieved that another level of control over the remuneration committee and aspects of pay reporting are unlikely to be taken forward.