Sunday, 27 September 2009

Tackling extremism on remuneration committees

There's a policy idea that unions have floated a few times in the past and that has come up once or twice in the financial crisis (Paul Myners touched on in it one speech) that I've always liked - putting some sort of employee representation on remuneration committees.

These committees, according to the Combined Code, are supposed to be sensitive to pay and conditions across the company when setting pay, yet many still manage to keep deciding that The Only Way Is Up for directors, even when cutting staff. The idea of having an employee rep on there would be to bring a bit of balance to discussions. Naturally enough, it is the sort of idea that most governance people in the UK would laugh at.

But there might be some evidence that actually it isn't a bad idea. Cass Sunstein's new book Going to Extremes is all about how people's views become more extreme if they are in groups of like-minded people. Groups of Democrats become more liberal when they talk together, Republicans become more conservative. The decisions these groups reach are more extreme than the views of the individuals that make them up had previously. The book details the real world effects of the this - juries reaching very different decisions depending on who is on them etc.

Sunstein says that this has obvious implications for business - particularly where board members reinforce each others' risk-taking mentality. And it does suggest that the notion of having independent non-execs on the board to provide challenge is therefore well-grounded.

But it also made me think of remuneration committees. Although these obviously have independent representation on them as best practice, what would seem to matter more is the committee members' attitudes to remuneration practices. Even if they are notionally independent, if they all share the view that you need to pay serious wedge and not quibble over large demands then surely they are likely to reach 'extreme' decisions on pay? (I mentioned this to a colleague at work and he immediately came up with the Dick Grasso case - the members of the compensation committee all being senior Wall Street figures).

So if we accept this basic line of argument, wouldn't it make sense to get someone from the shopfloor, even a TU rep, at least feeding into the remuneration committee, in order to try and disrupt the potential tendency to reach extreme decisions? (And thinking much further ahead, it would be interesting to research NEDs' views on remuneration, and see what the outcomes have been at rem comms where they sit with others with like minds).


Cantab83 said...

Surely part of the problem is the excessive cronyism and that exists between PLC boards, with the senior members of one serving as non-execs on the other and vice versa. This same problem is endemic on remuneration committees.

It is this networking that needs to be broken up to avoid conflicts of interest.

Possible solutions:
(i) Disqualifying anyone from a remuneration committee if their own salary is set by one.

(ii) Reduced voting rights for shares held in trusts/managed funds. This would give the small shareholders more power.

(iii) Tax PLCs in proportion to their bonus payments and their executive salaries. This gives shareholders an incentive to rein in such remuneration if it then significantly reduces net profit.

P.S. Like the theme of your blog. I will be posting some ideas of my own in this area in the near future that might interest you.

Tom Powdrill said...

Hi Cantab

Yes, it's exactly the same issue, I just focused in on rem committees. And Sunstein does talk about the need for independent representation on boards.

Personally I think if we take this message seriously then we need to think about whether people from the same sort of background are likely to share similar views (and thus polarise in the way Sunstein highlights). If we believe this is so then the long-standing argument that boards should draw on a much wider pool of talent than just other boards become stronger.

will watch out for your posts.