Remuneration policy should be consistent with effective risk management policies. Performance metrics should relate to the companys articulated strategy and risk tolerance, thereby aligning the interests of executives with the interests of long term investment money. Any good remuneration package will reflect an alignment of interests between the executive and the shareholders, incentivise through challenging performance criteria and deploy appropriate claw back arrangements which focus the mind. Read more about corporate governance:
A failure to secure the support of shareholders indicates that there may be a tough road ahead for those who set pay for executive directors. However, there are a number of initiatives to support a better dialogue. The Executive Remuneration Working Group of the Investment Association has embarked upon a project to encourage simplification of pay practices for companies on the UK markets. The Investment Association is hopeful that it can drive a change in behaviours away from the complexity and potentially distortive effect of Long-Term Incentive Plans, believing such plans to often result in a poor alignment of interests between executives and shareholders. The Quoted Companies Alliance, which supports companies outside of the FTSE 350 is a clear voice for transparency, proportionality and simplicity and has recently revised its “Remuneration Committee Guide for Small and Mid-Size Quoted Companies“, focussed on companies having an open and frank engagement with shareholders on remuneration issues and putting in place packages which can be well understood by both executives and shareholders. In addition, ShareSoc, the body which supports individuals who invest directly in the stock market, has created a document setting out the expectations on pay for its members which, again, repeats the call for good engagement, removing unnecessary complexity, and ensuring a good alignment of interests. What is key is to have positive engagement with shareholders. Shareholders who understand the thinking of a remuneration committee are likely to be better inclined to support its awards. In an environment where packages are inevitably smaller than for the larger listed companies there is a real possibility of smaller companies being able to set a better example to their larger cousins on our public markets. Edward Craft is a partner at Wedlake Bell.
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