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In it for the long run

Amendments to the UK Corporate Governance Code on remuneration

Home / Hermes EOS Blog / In it for the long run

Freddie Woolfe,
17 September 2014
Governance

The UK’s Financial Reporting Council (FRC) has announced the removal of the requirement for pay to be at a level sufficient to “attract, retain and motivate directors.”

We particularly welcome this and other amendments to the UK Corporate Governance Code on remuneration, as we believe the requirement has been a driver of ratcheting levels of pay. Equally, it has created a focus on the short-term needs of management which stands in direct contrast to the interests of a company’s long-term investors.

Pay should be designed to promote the long-term success of a company. Therefore, remuneration policies need to be geared towards promoting long-term, sustainable performance and the behaviours and culture that support it. This is what we have called for in our Remuneration Principles for Building and Reinforcing Long-term Business Success.

We are also pleased about the introduction of clawback and malus provisions into remuneration policies. These, we believe, are useful tools for remuneration committees as it allows them to take greater ownership of and be more accountable for pay outcomes. We support remuneration committees that take a holistic approach to performance rather than apply simplistic, mechanistic formulas to determine awards to executives. The amendments to this code provision should make this more of a reality for companies.

Similarly, the new requirements on risk and viability disclosures are likely to provide some useful material, which will enable shareowners to assess the quality and ability of companies’ boards. We, at least, look forward to using these disclosures in our engagements with companies.

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