Georgina Harvey & Matt Higgins: Exploring Remuneration Committees
BCKR was pleased to welcome Georgina Harvey and Matt Higgins recently, who shared with us their experience of Remuneration Committees.
Matt and Georgina are seeing a lot of each other at the moment as they are in the midst of a couple of weeks when all their RemCo work comes together. The flow of the Committee work is definitely not as it used to be. It is much more time consuming and involved. Long consultations with shareholders, explanatory letters, ten-page summaries at the end, 20+ meetings with shareholders in between, 20-30 pages on remuneration for the annual report, plus the need to look forward and backwards on all senior remuneration, for both the exec directors and the rest of the senior team, as well as keeping abreast of where the remainder of the works force sits. This is the most challenging couple of weeks in the cycle.
Matt and Georgina took the members through their helpful slides, which can be found here. The remainder of these notes do not cover the full presentation but focus on the extra bits of engaging narrative they provided.
A successful committee
More than for any other committee, relationships are key on RemCo. You can’t set rem in a bubble. You need lots of engagement with management, but the relationship has to stay very professional to make it easier to deliver news they do not want to hear. Big Yellow was unusual in having to drag the management to being paid well enough. Normally it is very much the other way around. Much will have been heard and discussed outside the committee room.
Ensuring you have a mix of backgrounds on the committee is important – sector experience, audit chair, HR experience (but you need to understand the bias of all involved – including the HR team).
Who does a Rem Consultant advise?
Management, the RemCo, the HR rewards team? The reporting line should be to the RemCo Chair but there is a need for the consultant to understand the management perspective too. An advisor shouldn’t meet with the executive team without running it by the Chair first.
An adviser might have a good perspective on shareholder sentiment. Their input can be very helpful in developing new approaches to e.g.: LTI or bonus structures. It really helps to have that outside perspective, since the consultant will already know how others are approaching the issues, both corporates and shareholders.
The Chair has to deliver difficult messages and sometimes they are received better when delivered by the adviser not the Chair.
An effective Chair
There are plenty of stakeholders to consider in the rem space. Careful handling of board, management, shareholders, and shareholder bodies [ISS, IA and PIRC] all of whom require different timings and approaches.
Consultations over changes to rem structure take at least three months. Georgina’s preference is to approach shareholders with what you’re looking for, from the off, and row back if needed. Some still choose to go in asking for too much to have ground to ‘give’.
A letter will go out to shareholders a few months ahead of the AGM outlining proposals for imminent changes to the rem policy, rem structure and levels. The letter announces that the company is opening a consultation, detailing when and how the Committee would like to hear from them. This could be sent to as many as 20-30 different bodies. The process of seeking shareholders’ views may be through meetings, calls, emails – all are possible, generally at the choice of the shareholder. Often the shareholders themselves will be opposed to each other’s viewpoint e.g. TSR measures for Rem loved by some, hated by others. (Total shareholder return – Dividends plus capital increase).
The Chair needs to be tough, principled and brave enough to do the right thing. They need to be prepared to listen and also to compromise, taking on the views of the shareholders. This is where the preparation outside the boardroom is vital, having papers prepped well in advance of the meeting.
Georgina’s natural approach is to have a consultation, listen to feedback, report back to the RemCo then produce a wrap-up letter which will explain any opposing views and why and what any proposed compromise might be. All then understand the rationale.
Things to consider include alignment with strategy, risk appetite, absolute levels of pay, the general environment, benchmarks and, even after all that, how strong a level of shareholder support the board requires. Some companies are content with a simple pass, with 51% of the vote, others seek less friction and require over 80%.
Areas of tension
Rem can feel like a hostile environment, with shareholders and the press against you, with the latter basing their views on truth or misinformation. This scrutiny can sometimes make it hard for the RemCo to make a decision that is right for the business. You need a mature executive team, which has a long-term approach to keeping shareholders happy. Sometimes the management are behind the curve in feeling how the market views executive pay generally and therefore their own rewards.
Target setting – Any adjustments to the Rem structure will require a shared understanding from the outset of why changes are being proposed, and how best to achieve the objectives. For instance, it is important to create an LTIP which aligns with shareholder experience – dividend and capital increases will have to sit comfortably against the chief exec’s pay.
It’s getting tougher!