More flexibility on exec pay needed to rebuild public trust - IA

Added 26th July 2016

Current executive pay structures both fail to incentivise performance and add to a growing reputational risk for all market participants, the Investment Association’s Executive Remuneration Working Group has said.

More flexibility on exec pay needed to rebuild public trust - IA

Established by the IA in Autumn 2015 to investigate the success of current executive pay structures, the five member strong, independent committee published its final report on Tuesday including a list of 10 recommendations to help rebuild public trust in remuneration structures.

The 10 recommendations fall across five areas: strengthening the accountability and appropriateness of remuneration committees; improving shareholder engagement; improving transparency; addressing actual pay levels and looking to alternative structures.

Running through all of the recommendations is a desire to increase the flexibility with which companies can approach remuneration.

“A common concern voiced throughout the feedback was that there was a single ‘onesize-fits-all’ model for executive remuneration in the UK,” the report says.

“The vast majority of companies structure their executive remuneration with a basic salary, benefits including pension provision, annual bonus (dependent on one-year performance targets) and long term incentive (dependent on three to five-year performance targets).”

According to the report, the dominance of this three-year long term incentive plan has come to exclude the adoption of other remuneration structures which may be more appropriate.

The dominance of the three-year Long Term Incentive Plan (LTIP) has come to exclude the adoption of other remuneration structures which may be more appropriate to the company’s business model or strategy.

“There needs to be more acknowledgement that all companies are different and will need different remuneration structures to recognise their particular business context,” the report adds.

While it acknowledged Prime Minister Theresa May’s comments on the potential to change current advisory vote system on remuneration reports to a binding vote, it said it has not had sufficient time to consider all the options of such a policy change.

But, it added: “It recognises that trust between companies, investors and wider society needs to be rebuilt and that additional binding votes might be a means to aiding this process [of rebuilding public trust].”

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Geoff Candy

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Geoff Candy joined Portfolio Adviser as News Editor in May 2014. He has been a financial journalist and broadcaster since 2005 and, in that time has worked in both South Africa and the Netherlands, covering everything from high street retailers and construction companies to mining and insurance.



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