Keeping executive pay in check and governing successful organisations that benefit everyone
Putting people and culture at the heart of corporate governance
More insights from HR teams could help ensure executive pay reflects organisational performance and purpose
New research published by the CIPD and the High Pay Centre today shines a spotlight on the need for a greater understanding of the role of people and culture in building successful, sustainable businesses.
The report argues that excessive pay amongst the CEOs of FTSE 100 companies demonstrates the shortcomings of the remuneration committees (RemCos) charged with setting and monitoring executive pay packages. It found that RemCos have too narrow a focus. As a result, the CIPD is calling for company boards to re-model their RemCos to become new People and Culture Committees (PACCs). These new committees would have a much wider remit than existing RemCos, which would see them draw heavily on the expertise of the people profession. They’d be responsible for ensuring that reward practices incentivise behaviours that are in the long term interests of individuals, businesses and the societies they operate in, and that organisational culture more broadly reflects the company’s core purpose.
Over the coming year, the CIPD and High Pay Centre will be calling for boards, shareholders and policy makers to make this change. If companies follow these recommendations, HR teams can expect to see greater demand for their insights and expertise. And senior people professionals will see more opportunities to have a voice at the boardroom table.
Why is change needed?
Trust in business remains worryingly low, and excessive executive pay is the most commonly cited factor (according to the Edelman Trust Barometer). The increasing gap between the highest and lowest earners, with no corresponding increase in organisational performance, is clear evidence of a serious failure in corporate governance. Previous CIPD research has also shown a lack of focus on the importance of people and culture in building successful, responsible and sustainable businesses.
Regulators and policymakers have already recognised the need to better align business practices with the interests of wider society. The Financial Reporting Council’s new Corporate Governance Code, in effect from 1 January 2019, asks boards to create a culture which aligns company strategy with purpose and values, and to assess how they preserve value over the long-term.
The Corporate Governance Code explicitly requires remuneration committees to review pay across the wider workforce. When setting executive pay, reasons must be given for why pay policies are appropriate using internal and external measures. In addition, RemCos must report on how executive remuneration aligns with wider company pay policy, and how they’ve explained this to the workforce. The Government also now requires large UK listed firms to publish the pay ratio between their chief executives and their median UK employee. All this effectively means that RemCos need to reduce their reliance on external benchmarks when setting pay, and focus more on organisation-specific measures of fairness and performance.
But this new research shows that RemCos in their current guise are not fit to meet these new requirements. Many of those involved admit themselves that they are ripe for reform.
What will change look like?
The report recommends that the new committees recruit their members from a broader range of backgrounds, including those with HR and people management expertise.
The PACCS’ responsibilities would include:
- Setting, monitoring and reviewing executive and board level pay packages.
- Executive level succession planning and capability development.
- Ensuring pay and benefits across the organisation are fair, proportionate and aligned with company purpose, guarding against rewards for failure.
- Governing organisational culture and workforce well-being.
- Ensuring that the behaviours and management styles needed to run a successful and sustainable business are rewarded and recognised.
HR teams will need to provide the committees with data and insights on organisational culture from sources including employee engagement surveys, employee advice lines, and disciplinary and grievance records. The PACCs will also be interested in progress on diversity and inclusion – both in terms of employee perceptions of inclusiveness but also in terms of tangible indicators such as gender and ethnicity pay gaps and the steps the organisation is taking to close them. Succession planning will also be high on the PACC’s agenda; they’ll need to see evidence that the right skills are being recruited and developed in order to ensure a solid pipeline of future leaders.
The CIPD believes that transparency on all these issues is key to ensuring that work is a force for good that benefits everyone, not just shareholders. While the report’s recommendations are aimed primarily at the boards of large, publically listed companies, the principles are just as applicable to organisations of any
How will we make it happen?
The recommendations may seem ambitious given the challenges HR teams often face in terms of influencing behaviours and decision making, but evidence shows that the appetite for change is there. According to the report, "business leaders themselves recognise that their job satisfaction and public esteem derives from the workplaces and career opportunities that they create, rather than from the size of their pay package."
Helping its members step up to the challenge – and opportunity – that this presents is a key priority for the CIPD. The professional body is taking a two pronged approach: on the one hand, fuelling demand for its members’ expertise, by using reports like this to engage with investors and policy makers; while on the other hand, helping members reach the highest standards of professionalism so they can meet the demands being placed upon them with confidence and integrity.
The new Profession Map provides a practical foundation for people professionals to make confident decisions and create more value in their work. It offers a framework for professional development with a focus on being principles-led, evidence-based and outcomes-driven. The Map sets out standards for the knowledge (such as HR analytics and business acumen) they’ll need to learn in order to feed evidence into PACCs and the behaviours (such as ethical practice, commercial drive and professional courage and influence) they’ll need to develop in order to influence change at board level.
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