In: Finance
. According to the UK Corporate Governance Code, explain how executive remuneration should be aligned to company purpose and values, and be clearly linked to the successful delivery of the Company’s long- term strategy?
Remuneration policies and practices should be designed to support strategy and promote long-term sustainable success.
• Executive remuneration should be aligned to company purpose and values, and be clearly linked to the successful delivery of the company’s long-term strategy.
• A formal and transparent procedure should be established in order to develop policy on executive remuneration and to determine the remuneration of senior management (defined as the executive committee or the first layer of management below board level, including the company secretary), as well as board directors.
• Directors should exercise independent judgement and discretion when authorising remuneration outcomes, taking account of company and individual performance, and wider circumstances. Key new features in the provisions
• Before appointment as chair of the remuneration committee, the appointee should have served on a remuneration committee for at least twelve months. The minimum number of independent non-executive directors on the committee is three, two for smaller companies.
• Independent judgement should be exercised when evaluating the advice of external third parties and when receiving views from executive and senior management. Any connection between the remuneration consultant and the company or individual directors should be identified in the annual report.
• Remuneration schemes should promote long-term shareholdings by executive directors that support alignment with long-term shareholder interests
• In normal circumstances, share awards granted should be released for a sale on a phased basis and be subject to a total vesting and holding period of five years or more. 7 Governance in Brief
• The remuneration committee should develop a formal policy for post-employment shareholding requirements encompassing both unvested and vested shares.
• Remuneration schemes and policies should enable the use of discretion to override formulaic outcomes.
• When determining executive director remuneration policy and practices, the remuneration committee should address a number of factors. These include: clarity; simplicity; identification and mitigation of potential reputational, behavioural or other risks; the range of potential outcomes; a demonstrable link between individual awards and long term performance; and alignment to culture (including driving behaviours consistent with company culture and strategy and in the context of the workforce as a whole).
• The annual report should include:
– an explanation of the strategic rationale for senior executive remuneration policies, structures and any performance metrics
– reasons why the remuneration is appropriate based on internal and external measures, including pay ratios and pay gaps
– whether the policy operated as intended in terms of company performance and quantum and, if not, what changes are necessary
– what engagement has taken place with shareholders and the impact this has had on remuneration policy and outcomes
– what engagement with the workforce has taken place to explain how executive remuneration aligns with wider company pay policy
– the impact of any board discretion on remuneration outcomes Changes made to existing Code principles and provisions
Senior management pay – under the existing Code, the remuneration committee should ‘recommend and monitor’ the level and structure of remuneration for senior management. This has been strengthened to give the remuneration committee responsibility for setting remuneration for senior management.
Workforce policies and practices – the existing Code requires remuneration committees to be ‘sensitive to pay and employment conditions elsewhere in the group.’ The revised Code places greater emphasis on the role of the remuneration committee, which should now review workforce remuneration and related policies and the alignment of incentives and rewards with culture, taking these into account when setting the policy for executive director remuneration.
Pensions – there is now a specific provision relating to pension arrangements, previously included in Schedule A. This emphasises the need to take into account the pension consequences of salary increases, along with any other changes in pensionable remuneration or contribution rates and also now includes a reference to these being aligned to pension arrangements for the workforce as a whole.