I'm strongly in favour of the idea of employee representation on remuneration committees, so very pleased that it's a Labour policy these days. But if we are going to get it to work, in the hope that Labour gets back in 2015, we need to deal with a few practical issues. These are the sorts of questions I flagged up in my previous post.
There is an excellent TUC briefing on this subject which I won't seek to re-invent, especially as I agree with the positions set out in it, so I thought I'd set out how I think we could make this work.
Firstly, are we talking about employee reps on rem comms, or employee directors who sit on rem comms? The real question here is if we are going to establish the principle of employee involvement in UK corporate governance is a limited role in remuneration all that we should aim for? If we created employee directors who sit on rem comms then we're still meeting the policy commitment but as part of a much bigger shift in governance.
At present I personally think trying to establish employee directors across UK companies would be a real stretch. There simply isn't much support for the idea & as such it would also been seen as politically risky (although easy to counter with real-life examples like Germany). In contrast employee reps on rem comms alone could be achieved pretty easily (despite most mainstream corp gov people not being supportive) and shouldn't be a serious fight over it.
However I also think that if we are going to open this issue up it's a wasted opportunity if Labour doesn't look at the wider question of employee representation. So, some sort of review looking at the issue, as a way of fulfilling the commitment to employees on rem comms (which is the absolute minimum that should come out of the review!). If you think about it, this isn't too different to the Coalition consultation on executive pay - we knew a binding shareholder vote would be one result (because of the PM's public commitment to the policy) but there was an opportunity to look at other issues in the same territory.
Assuming we do end up with the reps rather than directors model, how do we achieve it? In common with the TUC I think any easy way in is to simply tweak the Corporate Governance Code to say rem comms should have employee representatives.* I would also definitely make it representativeS for the simple reason that one rep on their own may find it hard to speak out, so two at least.
In terms of appointment, I think where a union is recognised they ought to nominate the employee reps, as they are likely to be able to provide support (dealt with more below). Where there isn't a union, employees could put themselves forward with an election taking place if there more than the required number of candidates.
In addition, given the limited role envisaged for employee reps I again share the TUC's view that it's not obvious why they should face a shareholder vote, especially as below-board employees sometimes already participate in CSR committees.
Finally, who trains them? I think the unions would probably provide support to members on rem comms in any case, but it makes sense for there to be some arms-length bodies offering training too. It is obviously very important that this is a separate provider to any rem consultant employed by the company. In fact in general, I think rem consultants ought to be kept out of it.
I think the training itself should involve at least three elements. First, the ideas behind pay policies - in particular the theory behind the use of incentives schemes (obviously I would prefer this leans heavily towards scepticism about performance pay). Second, industry data and trends (in order to provide background info) and guidance on how to interpret the data. Thirdly, behavioural training - understanding the dynamics in the committee, what arguments to look out for, how to be avoid being hoodwinked etc.
I think some of the could be set up now and, if we want to make sure that this is a policy that is ready to be rolled out quickly, it might not be a bad idea to get some basic plans in place.
* This could set up an interesting situation. Assuming we did go down the 'tweak to the Code' route then companies could, of course, 'explain' any non-compliance. That in turn leads to the question of whether shareholders would challenge them if they did not comply with this provision - could vote against on the rem policy vote, for example. If shareholders in turn did not challenge non-compliance (because, perhaps, they don't accept an employee role in rem discussions) it would create an interesting problem. Shareholders (asset managers) might argue that they have no obligation to enforce a policy they don't agree with. But in turn if I was a trustee on, say, a TU pension fund or a Labour-controlled LGPS fund I might not be very impressed with my asset managers.