Future Trends in Executive Pay and Bonuses

18 Dec 2017

For many reading this blog, the pay of senior executives in FTSE 350 companies may seem far removed from the pay considerations of their own businesses.

However, the annual Open Letter and Review from the Investment Association (‘IA’) www.theinvestmentassociation.org/media-centre identifies a number of things which may in time filter through to most employers, introducing changes to the way they approach the remuneration package for senior executives. Following on from the substantially revised Principles set out last year, the IA highlights the need for remuneration committees to look critically at a number of areas, including:

  • Levels of executive remuneration;
  • The remuneration structure adopted;
  • The choice of performance measurements; and
  • Accountability of those involved in and chairing the remuneration committee itself.

The Principles emphasise that remuneration policies should promote long term value creation and encourage the sustainable financial health of the business.  Remuneration and bonus policies should be simple and transparent in operation.

Of particular interest to a wider audience are the suggestions in relation to pay ratios, and the focus on bonus structures and targets.

Pay ratios

With many employers getting to grips with the various gender pay gap calculations, the IA’s proposals identify the importance of looking at the differential between executive pay (irrespective of gender) as against the organisation’s median paid employee. The current suggestion is that the figures should be produced in relation to the CEO, and the Executive Board generally, but one can see how this could easily be extended to all statutory directors. Although some would say that such calculations are meaningless once the multiple exceeds single figures, there can be little doubt that the High Pay Centre Campaign http://highpaycentre.org/counter has created interest and the potential for negative publicity in this area.

Bonus Structures and Targets

In terms of bonus structures, there is clear encouragement for performance adjustment and clawback provisions to be included in bonus schemes.  These would allow for retrospective recalculations of bonuses already paid, with a requirement that the employee repays some or all of the money already received.  Although this may seem very sensible in principle, were such an approach to be taken by other employers, that would amount to a dramatic change of approach and would need to be handled with care.

Such developments may seem unlikely, but in recent years the move away from long notice periods and bonuses based on short term results, started by larger companies has become part of the norm for  a very wide range of businesses.  It seems likely that changes around pay reporting and bonus scheme clawback may well do the same.

If you would like to discuss the issue of senior executive pay and bonuses in detail, please contact Rustom Tata (see below for contact details)  or your usual contact in the Employment Team.

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