Would it be different if there were more female politicians, BBC representatives and non-financial-services professionals on remuneration committees? I doubt it
I am not convinced that the headline conclusion of the High Pay Centre’s report released on Monday – which suggests that remuneration committees were a closed shop in which 46% of the members are current or former lead executives of large companies – is what drives executive compensation upwards.
The report says the majority of non-executive directors who sit on remuneration committees come from similar professional backgrounds and are generally male. Only 10% of FTSE 100 non-executives directors (NEDs) sitting on remuneration committees do not come from business or financial services backgrounds and only 16% are women, implying that at least 84% of the members sympathise with the poor working senior executives and understand why their pay needs to be kept high.
Of the 37 NEDs on remuneration committees who are not in business or financial services, 22 are in politics, the civil service or the BBC, one is a film producer and 14 are legal, accounting or academic professionals.
The report then points out that the role of NEDs and the remuneration committee is to ensure their companies have the best executive team in place and they are rewarded appropriately. The report acknowledges that remuneration committee members often fear executives will be tempted to leave or be poached by a rival and this drives higher compensation to avoid such outcomes.
Therefore, most boards pay above the median for salary and increasingly make awards in the upper quartile of the pay scale for performance-related compensation. The report says: “It takes a very brave remuneration committee to seek to pay its executives below the median. It is seen as the equivalent of admitting they are mediocre or not up to the job.”
This last bit is the part of the process I recognise and I wish the report went further into how boards operate and the relationship they have with senior management. The reality is that it is often easier to just offer the salary and bonus in line with market expectations than linking strategic and financial objectives for a senior executive with a thoroughly evaluated year-end performance review.
I think the commission should look at how often a chief executive is reviewed and whether the chairman and other NEDs participate in a rigorous process rather than suggest high pay is just part of an old boys’ process.
What is still unclear is whether the process would work differently if there were more female politicians, BBC representatives and non-financial-services professionals – and fewer male business people – sitting on the remuneration committee. I would sincerely doubt it.
Most NEDs, regardless of their business experience or gender, know that they are responsible for the health and stability of the company above all else. While they are indeed mindful of public outrage over executive pay levels, they have to balance all the appropriate risks associated with their decisions and come to the right recommendation for the business overall.
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