New analysis: Just rewards at the top?

With executive remuneration policies in the spotlight, the role of benefits consultants is also under scrutiny…

As shareholders come under pressure to monitor companies’ remuneration policies, employers are finding it harder to win the vote on changes to executive reward. Institutional investors are also being pressed to ensure executive reward at firms in which they own shares is linked to financial performance. Erfan Hussain of the Association of British Insurers (ABI), said: “The key issue with remuneration is there should be a link to performance. As we have gone from boom to bust, that performance has fallen. The consequence of that link is that remuneration should follow the same direction.”

Last month, retailer Next was criticised for proposing excessive rewards for its top executives. The ABI issued notification to investors that Next had seriously breached corporate governance by changing its rules on bonuses part-way through the financial year, but despite this, more than 80% of Next shareholders voted in favour of the change at the company’s annual general meeting in May.

The ABI’s rules are based on the Combined Code established by the Financial Reporting Council, which sets out standards of good practice in areas such as remuneration. Although the code is nonbinding, companies which adopt remuneration policies that fail to comply have to explain themselves to shareholders.

The National Association of Pension Funds (NAPF) also uses the Combined Code as the basis of its corporate governance policies and voting guidelines. These policies are produced to help pension funds and other institutional investors to interpret the Combined Code when considering voting decisions at company meetings.

The NAPF has toughened its stance on remuneration. Its guidelines now state executive directors’ base pay increases should be capped at inflation and bonuses should be aligned with profits. NAPF spokesman Mark Brooks said: “Failure should not be rewarded – not just because it is unwarranted, but because of the reputational damage it does to a company and to UK business as a whole.”

In April, the European Commission set out principles on remuneration in the financial services sector, which included the stipulation that a company’s board should be responsible for any oversight in the operation of the remuneration policy, and board members and other staff involved in designing and operating the policies should be independent. These recommendations come at a time when the role of benefits consultants is being questioned. “We believe there is some conflict of interest with consultancies,” said Hussain. “Sometimes non-executives will use them because they are the ones that are part of the remuneration committee to set the pay.

But the board will often use them as well, so there is an natural conflict of interest.” But Robert Burdett, a principal at Hewitt New Bridge Street, said consultancies often act as advisers to remuneration committees and typically report to independent nonexecutive directors. “Part of our role is to ensure the committee is abreast of the likely view of shareholders on proposals.”