In its report published earlier this week, the Executive
Remuneration Working Group notes that not enough attention has been
paid to the skills and experience of the remuneration committee as
a factor affecting the design and level of executive pay awards.
The Working Group suggests that there is a need for a 'recent
and relevant experience' test, as exists for audit
This is a sensible proposal. The difficulty might be in agreeing
what 'relevant experience' amounts to for remuneration
committees. This is fairly straightforward when considering the
audit committee – you need at least one member who
understands finance and accounting and at least one who understands
the company's business model. But when it comes to the
remuneration committee, what some will see as a strength others
will see as a weakness, and vice versa.
Take, for example, the question of whether to have executive
directors of other companies sitting (in a non-executive capacity)
on the remuneration committee. At the request of Vince Cable, the
FRC consulted on whether to ban this practice in the UK Corporate
Governance Code in 2013. There was no consensus on the issue. Some
argued that 'executive non-executives' had a vested
interest in keeping pay artificially high across the market; many
others – including many investors – considered that the
knowledge of the current operating environment that a serving
executive director could contribute might actually be
The aspect of experience that the Working Group highlights is
the length of time on the board. It argues that selecting
established board members for the committee should ensure they have
'the appropriate knowledge of the business [and] the
personalities on the board'. I suspect there will be some who
will view that as evidence of 'cosiness' that will make the
committee less inclined to resist the demands of management.
The working group recommends that the committee chair should
have been on the board at least a year before taking on the
position of chair. Although I think this is another sensible
proposal, I doubt it will be sufficient on its own.
We have looked at the composition of the remuneration committees
of the 10 FTSE 350 companies that had the biggest votes against
their remuneration reports this year. There are two committee
chairs who have been in post for two years or less and went
straight into the job when first appointed to the board. But many
of the others are much more experienced.
On average, the 10 committee chairs had held the position for
just under four years and had been board members for just under
five. The average length of time served on the board by all
committee members was over four years. On the face of it, lack of
familiarity with the company should not have been an issue.
Although knowing the business is important, it does not appear to
guarantee the right outcome.
The question of what skills and experiences are needed on
remuneration committees merits further debate, all the more so in
the light of the Prime Minister's proposals to ensure the views
of employees and consumers are heard in the boardroom.
Now may also be the time to revisit some of Vince Cable's
other suggestions, such as inviting independent or advisory members
to join the committee without requiring them to become full
non-executive board members.
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