Our letter highlights a flaw in the 2013 remuneration reporting regulations. We are calling for more clarity about the relationship between companies and the remuneration consultants they use.
Rt Hon Sajid Javid MP
Secretary of State for Business Innovation & Skills
Department for Business Innovation and Skills
1 Victoria Street
London SW1H 0ET
2nd July, 2015
Flaw in the 2013 Remuneration Regulations
The last coalition government delivered new powers to shareholders to tackle the problems associated with executive pay which became evident during the banking crisis. The High Pay centre welcomed these changes as a positive step toward proper accountability for a board’s pay decisions.
We are writing to you now to bring to your attention what we believe to be a flaw in this new regulation with respect to reporting of a company’s relationship with its remuneration consultants.
The Large and Medium Sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013 include disclosure requirements intended to satisfy readers of an annual report that any remuneration advice provided was independent and to demonstrate how the remuneration committee reached this conclusion.
Companies are routinely making assertions of independence based on their consultants’ membership of the Remuneration Consultants Group despite the fact that almost all of the companies buying remuneration services from Remuneration Consultancy Group code signatories are also employing the same firm to provide services other than remuneration services.
The principle that fees for one kind of work may have an impact on the independence of consultancy also provided by the same firm is well established in the audit market and in the market for broker research.
The High Pay Centre research into reporting of the fees paid to firms doing remuneration consultancy identified that fees paid for work un-related to remuneration can dwarf remuneration consultancy fees.
The value of these other commercial relationships is clearly relevant to independence but is unknown by shareholders expected to vote on remuneration policy.
In order to remedy this flaw we would support the re-introduction of the following text that was removed from the draft version of the regulations which was released for consultation in March 2013.
… in the case of any person named under paragraph (b) (provider of advice and services to the rem co materially assisting the committee)
(c)(i) The nature of any other services that that person has provided to the company during the relevant financial year….
…the amount of fee or other charge paid by the company to that person for the provision of the advice or services referred to in (b) and the other services referred to in (c)(i) and the basis on which it was charged…
The regulatory environment that has an impact on the independence of remuneration consultants has changed since the June 2013 decision to remove this reporting obligation from the draft regulation.
In the UK, audit firms now increasingly dominate the remuneration consultancy market and have become subject to strict new rules on independence since the remuneration regulations were introduced. In light of the changed regulatory landscape, it is appropriate in our view to review the current wording.
The research conducted recently by the High Pay Centre into reporting of remuneration consultancy relationships is attached for your consideration.
We would be happy to discuss the issues raised at your earliest convenience.
High Pay Centre