Many clients are flexing their RemCom muscles for the first time this autumn. As part of a series of blogs and events we help you crack the code – in this case the snappily titled UK Corporate Governance Code – of working as part of a Remuneration Committee.

Basics: What are the principles?

The UK Corporate Governance Code contains clear guidance:

"Executive directors’ remuneration should be designed to promote the long-term success of the company. Performance-related elements should be transparent, stretching and rigorously applied.

There should be a formal and transparent procedure for developing policy on executive remuneration and for fixing the remuneration packages of individual directors. No director should be involved in deciding his or her own remuneration."

This guidance technically only applies to the FTSE 100 Premium Shares but makes sense for all companies, listed or not. You don’t have to comply, but the code acts as a framework to guide you – and for those companies planning an IPO or trade sale – it makes sense to root your practice in this highly compliant soil. At best, remuneration strategy at Board level should join up the story of how the business plans to succeed for its investors, with how it shares its success with the senior team who helped to create it.

Base pay

"The remuneration committee should judge where to position their company relative to other companies. But they should use such comparisons with caution, in view of the risk of an upward ratchet of remuneration levels with no corresponding improvement in corporate and individual performance, and should avoid paying more than is necessary. They should also be sensitive to pay and employment conditions elsewhere in the group, especially when determining annual salary increases."

So first steps might be to make a comparison with other organisations in the same sector that are a similar size. Companies you might lose employees to, or hire from. Companies on a similar trajectory to your own – high growth, or more stable income producing businesses. Linking your company goals with remuneration practice demonstrates your business is good at joining theory and practice. Your reward model should be custom made to reflect your own DNA. Are you a high growth, high risk, high reward firework, or mature income producing odds-on favourite?

In addition, being wary of using such comparisons means, there has to be a basic understanding in your company of what ‘Good’ and ‘Great’ performance looks like, regardless of what others are doing. Our work tends to be with high growth businesses who want to create growth into the future.  This creates an interesting conflict sometimes, where the current size of the business would dictate a certain package for a new hire, but in reality they are being hired to bring about growth – and that comes at a higher price tag. We suggest putting some science behind gut feel by developing tramlines – where the business is now, and where it aspires to be in the future.

Variable pay

Link it to performance – preferably long-term performance – but with an annual plan which focuses on short-term, urgent and in-year goals. 

"Non-executive directors should scrutinise the performance of management in meeting agreed goals and objectives and monitor the reporting of performance. They should satisfy themselves on the integrity of financial information and that financial controls and systems of risk management are robust and defensible. They are responsible for determining appropriate levels of remuneration of executive directors and have a prime role in appointing and, where necessary, removing executive directors, and in succession planning… Schemes should include provisions that would enable the company to recover sums paid or withhold the payment of any sum, and specify the circumstances in which it would be appropriate to do so…"

That is all the guidance the Code gives on performance, but it reminds that pay for performance should be based in measurable outcomes. Having a range of metrics is fine, but they have to be clear, understandable and quantifiable. Being linked to investor’s interest is essential but the Board also need to ensure they are confident growth is sustainable. An example: growth in market capitalisation underpinned with EPS gives roots and wings to a long-term plan. 

Finally, the code reminds us that it doesn’t always end happily ever after – like Premiership football managers, the tenure of an Executive Team can be 'nasty, brutish and short'. If the non-Executive Directors decide it’s not working, be prepared for termination.

"The remuneration committee should carefully consider what compensation commitments (including pension contributions and all other elements) their directors’ terms of appointment would entail in the event of early termination. The aim should be to avoid rewarding poor performance. They should take a robust line on reducing compensation to reflect departing directors’ obligations to mitigate loss."

As an HR professional, or a non-Executive Director, your role is to help the Remuneration Committee function smoothly, ensuring that reward is fair, retains key individuals, rewards performance but doesn’t expose the business to unnecessary risk or cost. A tricky balancing act and one we will explore further over the coming weeks.

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