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Quantum of not very much solace

Good as far as it goes, which was not far enough: the Investment Association's executive pay working group report

Sensible people, trying their best to do sensible things. That was the impression created by the panel of experts invited by the Investment Association to report on current practices in executive remuneration. Yesterday this panel (or “Working Group”) published its final report.

The panel has come up with ten uncontroversial recommendations, which by and large pass the common sense test. And yet you wonder why some of them need stating at all. “Companies should focus their engagement [with shareholders] on the material issues for consultation,” runs recommendation no. 6. “Boards should ensure the company chairman and whole board are appropriately engaged in the remuneration setting process,” goes no. 3. “Shareholders should be clear with companies on their views on and level of support for the proposals,” runs no. 5. Ok.

The working group uses several abstract nouns to describe what they think we need more of. Flexibility, simplicity and transparency are all good, while complexity is bad. And they accept that the status quo is unacceptable: “Complicated performance measurement has meant that there is now a growing and disproportionate amount of shareholder engagement spent on executive remuneration, to the detriment of other governance issues…The Working Group believes that a fresh approach is needed to consider how executive pay could better align the interests of executives, shareholders and the company.”

What form might this fresh approach take? Well, there would be less use of Long Term Incentive Plans (LTIPs), which seem to be neither very long term nor effective in providing an incentive. Boards should exercise more discretion and imagination in constructing their pay structures. It should all be clearer and simpler.

And how much should senior executives get paid? Here there is less clarity. Which is to say: none at all. The level of executive pay is not discussed until page 20 of a 23 page report. “The Working Group is mindful of the dangers of ignoring the issue of absolute amounts of executive remuneration,” the report states. However, a few lines further on we read: “The issue of overall quantum was not an issue which the Working Group were asked to consider.” And a few lines later, in case we had net yet grasped the point, we are told: “The Working Group does not feel it is their role to recommend absolute levels of remuneration; this is a matter for individual boards.”

The nettle of “quantum” – that is, amount or level – goes ungrasped, again. And yet it is precisely the level of pay at the top which provokes public concern and casts business in a bad light. This is the popular sentiment which the new prime minister, Theresa May, has responded to. She has suggested not merely the use of pay ratios – accepted more or less by the Working Group – but also annual binding shareholder votes on pay (on which the Working Group did not feel ready to pronounce – there is a suggestion that perhaps a binding vote could follow where a board has received less than 75% support the year before). Worker involvement in helping to set executive pay, another of the new prime minister’s recommendations, is not discussed by the Working Group either.

Most of the extensive consultation (over 30 meetings) carried out to help produce this report took place before Mrs May upset the governance apple cart on July 11. So it is hardly surprising if there has not been time to come to terms with everything that was said in the new PM’s Birmingham speech.

And yet this report, good as far as it goes, must also be seen as another missed opportunity to have an explicit and unequivocal discussion about “quantum”. Without that, public concern will continue to grow, unease will persist, business and business leaders will remain banished to the dog-house, and not a single step in a healthier direction will have been taken.

We will be back here again in a few years’ time, agonising over another well-intentioned but ultimately ineffectual report.

Posted on 27 July 2016

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