How businesses manage the pay of their employees and particularly their executive remuneration is coming under increasing scrutiny, especially as from 1 January this year, all large qualifying companies (those with more than 2,000 employees with turnovers of £200million or more and a balance sheet of more than £2billion) will be required to include a statement of their corporate governance arrangements when reporting on their financial years. But the question is, can this approach actually be beneficial for companies of all sizes?
Those in industries such as regulated Financial Services and Publicly Listed Companies are already old hands at this rather daunting task. They have been operating strong corporate governance and working to a set of guiding principles, keeping the shareholders and customers at the heart of what they do as much as possible – and for most, it has been working to their advantage.
For other private companies however, it has been a different story. This is new territory – and many are only just starting to dip their toe into this unknown arena. Although there has not been the same external requirement for private companies to operate or report in this way, what we have actually learnt is that current thinking and guidelines can be extremely useful for the operational success of companies if just applied in a ‘light touch’ and carefully considered manner.
There are many reasons why it may be good to look at this more seriously. If a business is growing, for example, either through organic growth or due to a recent acquisition, they may find it much harder to manage pay and reward consistently across an organisation which is shifting, changing and becoming ever more complex. Similarly, companies may be looking to seek IPO or equity investment, in which case a whole set of requirements will be brought to life to help them prepare for life as a listed business or with new equity owners.
So what can we learn from what already exists in terms of guiding principles, and what is the best way to approach something like a ‘light touch’ remuneration committee when you are starting from a blank canvas?
Having worked with and supported many clients over the years that have wanted to do just this, I was very excited to see the recent publishing of the Wates Principles. These form a solid framework that can be applied to all companies at some level, and we can learn a great deal from them. So what are they?
1. Purpose and Leadership
An effective board develops and promotes the purpose of a company and ensures that its values, strategy and culture align with that purpose.
2. Board Composition
Effective board composition requires an efficient chair and a balance of skills, backgrounds, experience and knowledge, with individual directors having sufficient capacity to make a valuable contribution. The size of a board should be guided by the scale and complexity of the company.
3. Board Responsibilities
The board and individual directors should have a clear understanding of their accountability and responsibilities. The board’s policies and procedures should support effective decision-making and independent challenge.
4. Opportunity and Risk
A board should promote the long-term sustainable success of the company by identifying opportunities to create and preserve value and establishing oversight for the identification and mitigation of risks.
5. Remuneration
A board should promote executive remuneration structures aligned to the long-term sustainable success of a company, taking into account pay and conditions elsewhere in the company.
6. Stakeholder Relationships and Engagement
Directors should foster effective stakeholder relationships aligned to the company’s purpose. The board is responsible for overseeing meaningful engagement with stakeholders, including the workforce, and having regard to their views when taking decisions.
A few personal and more practical application additions of mine would probably be:
Calendar & Meetings format
Hold meetings just often enough to ensure that each meeting adds value and has a purpose - for example, pre and post annual pay review/bonus award.
Format of documents & communication
Establish the formality level, aligned to your culture, whilst being pragmatic in expectations to ensure that the objectives of the RemCom light is to support the pace of a business and inhibit.
What is truly important however when taking on these high-level principles as a frame for management is to decide how to appropriately apply them to your business. Ask yourself:
• What does the business want and need?
• Is it a Reward Evolution Team that you need, not a Remuneration Committee?
• What are our main key dates? How do we want to use technology to support us? Is it for pre and post annual pay review or for evolving reward?
• Do we need to have a paper writing and approval approach?
• Do we want to have some rules around the format and delivery, keeping it creative and insightful?
• Who would add real value to the meetings?
Launching the principles, James Wates, Chairman of the Coalition Group, said, "The Wates Principles provide a tool to help large private companies look themselves in the mirror, to see where they have done well and where they can raise their corporate governance standards to a higher level".
It’s time to set the bar.
Innecto works with clients to establish a ‘fit for purpose’ approach that puts a level of management into how pay and reward is achieved. To talk to Sarah or one of our other experts about your needs, get in touch with our team on 020 3457 0894.
