Why is it important?
Executive remuneration is key to aligning management with company strategy and performance. Remuneration practices can provide significant insight into a company’s culture, performance and strategy. Well-structured remuneration practices can support the long-term success of a company. Conversely, excessive pay, persistently high bonus outcomes and lack of alignment with shareholders can adversely affect a company’s licence to operate. This in turn may negatively affect the value of our members’ investments.
Variable remuneration schemes should be underpinned by demanding and relevant performance hurdles, be genuinely at risk, and capable of acting as a true incentive for performance above the executive’s core duties. Remuneration structures should be aligned to the company’s values, encourage the sound management of non-financial risk and reduce the risk of misconduct.
We believe that the vote on the remuneration report and the two strikes rule should be supplemented with a binding vote on pay policy every three years. Investors need greater influence to prevent pay outcomes that are inconsistent with their expectations. A binding vote on pay policy allows investors to provide their views on how pay structures would operate in future.
We expect boards to make a regular assessment of the effectiveness of their remuneration systems which can inform developments in pay policy. We also recognise the importance of the board retaining discretion (and the accompanying accountability) to formulate a pay policy that is appropriate to their company. Nonetheless, a company’s pay policy should describe certain components, so that investors have appropriate information to form a view on how the policy might work in practice and potential outcomes.
The current vote on remuneration outcomes remains important to provide feedback to the board on how the pay policy is implemented. Where a company receives a significant vote against its remuneration outcomes, it should engage with investors, revisit its pay policy and submit an updated pay policy for shareholder approval the following year.
Our view is that good disclosure can also promote better outcomes. We support CEO pay ratio disclosure and believe that modelling and disclosure of the effect of share price movement on pay is helpful information for investors.