Wednesday, 23 January 2013

"sensitive to pay and employment conditions elsewhere in the group"

When the first burst of corporate governance reform that created our present system in the UK took place in the 1990s, one of the issues that was of concern was executive pay. In particular it was felt that companies needed to be aware of how escalating executive reward might be seen if their workforce was facing a tough period.

As a result a little sentence was put into the guidance on remuneration which now appears in the UK Corporate Governance Code. The current version gives the following guidance to remuneration committees:
They should also be sensitive to pay and employment conditions elsewhere in the group, especially when determining annual salary increases.
In addition, if I remember the Companies Act now requires companies to state how they take account of  these factors.

Having read quite a few remuneration reports, I would said that in practice companies deal with both the Code and the Companies Act in a very perfunctory way. This is both in terms of disclosure, where companies often simply state that they have considered the posistion of employees when making decisions (rather than giving details), and actual policy. We've seen some cases of people declining bonuses because of other factors (ie bankers, James Murdoch etc) but you don't really see if because of what is going on in the wider workforce.

Of course in part that was because we were on the way up for a long time. But now we are in a period of austerity, these issues come into sharper focus. There are now plenty of companies where pay and employment conditions are not looking great. So shouldn't we be seeing a real freeze on rem comms?

I think this is worth pursuing further. In particular here are a few issues for left-leaning corp gov types to consider -

Have any companies reported that they are freezing exec pay, or waiving bonuses or other incentive awards because of what is going on with employee pay, or employment levels? What about Lonmin for example?
Have any companies where employees are facing a pay freeze or job cuts decided to delay bonuses, salary rises etc to take advantage of the top rate tax cut?
In light of these issues are any investors voting against remuneration reports because the rem comm hasn't demonstrated sensitivity to employment conditions?

To be honest I suspect some institutional investors have never opposed a company remuneration policy on the grounds that the rem comm hadn't been sensitive to employee pay and employment conditions. That means that there is no real oversight of a bit of the Code that attempts to address the issue of fairness within companies. If investors don't start taking this seriously in this difficult economic environmentthen  I think we can conclude that this bit of the Code is basically meaningless, and as such we should be looking for other solutions.

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