25th November 2016
Executive pay design and governance needs to be reformed to rebuild trust in business and to create incentives for long-term, purposeful behaviour
The Purposeful Company Taskforce, a group of leading companies, Investment Houses, leading Business Schools and Business Consultancy Firms, established by Big Innovation Centre and supported by the Bank of England, has issued an Interim Policy Report, on executive pay reform.
This interim report finds that current pay practices can encourage short term behaviour and that action is required to rebuild trust in how executive pay is set and governed. Pay plans need to incentivise and reward sustainable long-term performance. This means removing incentives to short-term behaviour, measuring CEOs based on truly long-term performance, and aligning targets with non-financial and strategic measures rather than short-term financial goals. The paper makes four recommendations to align CEO pay with long-term performance, company purpose and to rebuild trust:
- Companies should adopt simpler pay structures, with reduced reliance on traditional performance pay and more focus on higher and longer term shareholding extending over at least 5 to 7 years, depending on the business sector. Pay packages should result in CEOs rapidly building up shareholdings worth 2x the value of bonuses that can be awarded in any year. Cash bonuses should be limited to at most 25% of incentive pay and on non-financial and strategic goals rather than financial measures.
- Companies should be required to publish a Fair Pay Charter, setting out a company's principles on pay fairness, trends in the comparison between CEO and wider workforce pay over time, and with a requirement to engage with employees on its content through an appropriate forum.
- Executive pay reporting rules should be amended to provide a fuller picture of how CEO pay is linked to performance by: including disclosure of the change in CEO wealth over the year, including previously awarded shares, compared with the change in the value of the company; to show the impact of share price growth on the report value of payments made for the year; and to require a clear maximum on each element of pay.
- Shareholder voting rules should be extended, so that a company that loses its remuneration report vote or receives a vote below 75% two years in a row, is required to bring their remuneration policy back for binding approval as a special resolution requiring 75% support.
The Executive Remuneration Policy Report is available at http://biginnovationcentre.com/publications.
This is the first of a series of Policy Reports to be published over the coming months by the Big Innovation Centre’s Purposeful Company Taskforce, setting out proposals for how the UK's business environment can better support the creation of great, purposeful companies acting in the interests of all stakeholders for the long-term.
Commenting on the report Andy Haldane, Taskforce member and Chief Economist of the Bank of England said: “Executive pay is a matter of profound and legitimate public interest. Pay practices can encourage short-term behaviour in ways which harm both firms and the economy over the long-term. Moving pay practices in non-financial firms towards those in financial firms can help in tackling those problems."
Clare Chapman, Taskforce member, non-executive director of Kingfisher and Heidrick and Struggles said: "All of us involved in UK business are needing to rethink how we achieve growth in the new environment. We support the Government's objectives of rebuilding trust in executive pay, ensuring it is linked to long-term performance, and giving shareholders the right powers. This report provides positive solutions for achieving those objectives, based on the best available evidence. Radically rethinking how pay can support long-term behaviour is now the imperative and this Report can be a huge accelerator for Boards wanting to adapt quickly.".
Will Hutton, Chair of Big Innovation Centre Steering Group, Taskforce member and Principal of Hertford College Oxford said: “I am delighted that the Purposeful Company Taskforce is issuing its first Interim Policy Report on such a topical and important subject. In my view, this is the most robust attempt yet to set out an evidence-based manifesto for executive pay reform - plainly much needed. These are feasible proposals - reframing but similar to those the government has floated - that if adopted could really move the dial on executive pay, link it more to the achievement of purpose and innovation and allay concerns in business and wider society that executive pay needs to be reassociated with business and social realities. The hope is to stimulate not just debate but change.”
The Purposeful Company Taskforce is developing a range of policy recommendations to support the development of UK companies driven by purpose. These will include recommendations on company law, corporate form, commitment devices, takeovers the investment chain, and intangible reporting. The Final Report will be launched in January 2017. If you wish to attend please contact Alice Piterova at email@example.com
James Chandler Hattie Stewart
Red Consultancy Red Consultancy
020 7025 6500 020 7025 6500
NOTES TO EDITORS
Launched in September 2011, the Big Innovation Centre is a hub of innovative companies and organisations, thought leaders, universities and 'what works' open innovators. Together BIC enlarges innovative capabilities, acting as a catalyst in co-shaping innovation and business model strategies – testing and piloting ideas - that are both practical and intellectually grounded, with the aim of making business more purposeful and inclusive through the enormous potential of technology, creativity and innovation. The vision is to help make the UK a Global Open Innovation and Investment Hub by 2025, and to build similar initiatives internationally.