In its report published earlier this week, the Executive Remuneration Working Group notes that not enough attention has been paid to the skills and experience of the remuneration committee as a factor affecting the design and level of executive pay awards. The Working Group suggests that there is a need for a 'recent and relevant experience' test, as exists for audit committees.
This is a sensible proposal. The difficulty might be in agreeing what 'relevant experience' amounts to for remuneration committees. This is fairly straightforward when considering the audit committee – you need at least one member who understands finance and accounting and at least one who understands the company's business model. But when it comes to the remuneration committee, what some will see as a strength others will see as a weakness, and vice versa.
Take, for example, the question of whether to have executive directors of other companies sitting (in a non-executive capacity) on the remuneration committee. At the request of Vince Cable, the FRC consulted on whether to ban this practice in the UK Corporate Governance Code in 2013. There was no consensus on the issue. Some argued that 'executive non-executives' had a vested interest in keeping pay artificially high across the market; many others – including many investors – considered that the knowledge of the current operating environment that a serving executive director could contribute might actually be beneficial.
The aspect of experience that the Working Group highlights is the length of time on the board. It argues that selecting established board members for the committee should ensure they have 'the appropriate knowledge of the business [and] the personalities on the board'. I suspect there will be some who will view that as evidence of 'cosiness' that will make the committee less inclined to resist the demands of management.
The working group recommends that the committee chair should have been on the board at least a year before taking on the position of chair. Although I think this is another sensible proposal, I doubt it will be sufficient on its own.
We have looked at the composition of the remuneration committees of the 10 FTSE 350 companies that had the biggest votes against their remuneration reports this year. There are two committee chairs who have been in post for two years or less and went straight into the job when first appointed to the board. But many of the others are much more experienced.
On average, the 10 committee chairs had held the position for just under four years and had been board members for just under five. The average length of time served on the board by all committee members was over four years. On the face of it, lack of familiarity with the company should not have been an issue. Although knowing the business is important, it does not appear to guarantee the right outcome.
The question of what skills and experiences are needed on remuneration committees merits further debate, all the more so in the light of the Prime Minister's proposals to ensure the views of employees and consumers are heard in the boardroom.
Now may also be the time to revisit some of Vince Cable's other suggestions, such as inviting independent or advisory members to join the committee without requiring them to become full non-executive board members.
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