For and Against
Investors should have more say.
Directors have shown much reluctance for greater disclosure in the face of persistent public calls for pay restraint.
Perhaps both parties are missing the point. Directors are no different from other professions and should be highly rewarded if it is their performance that builds market-beating companies. In a global marketplace, this may mean remunerating directors by international standards.
Directors need to realise it is the secrecy surrounding their earnings that attracts attention. If they want secrecy, it may be because they are not making the difference.
Despite the sensationalism that envelops the issue resulting from a few high-profile cases, a recent survey by the Institute of Directors showed that, on average, directors have had pay increases of 4.5% over the last year and can expect little more this year.
Directors in poorly performing companies, who persist with pay rise demands, are increasingly attracting negative attention. But where pay is linked clearly to performance, then directors should hold little concern for disclosure of contracts in the accounts.
The real issue is not disclosure but poorly designed and weakly monitored performance-related pay. A more rounded process to regulate directors’ pay should be considered, backed up by more open disclosure.
Many companies have remuneration committees. These consist primarily of non-executive directors, with a vested interest in the overall level of directors’ pay. Given the obvious conflict of interest, it is not certain that this model works for large companies and is, perhaps, inappropriate or unachievable for smaller companies.
Giving shareholders a vote might seem like the obvious answer. However, the power at shareholder meetings usually rests with institutional investors who have traditionally not taken an active role, leaving smaller investors with little redress.
Ideally, remuneration committees should be used, but these should include equal representation from institutions, individual investors, non-executive directors and employees, with annual rotation.
Directors should make their case for greater pay to this committee, and if they truly make a difference and are the invaluable leaders of men and women that they lay claim to be, then those big remuneration packages should be fully justifiable!
– Ashley Whittaker is CEO of Cevas Data Systems
IN PRAISE OF THE COMPANY DIRECTOR
A survey of Institute of Directors members in 1998 showed that 60% of more than 1,600 respondents agreed that director remuneration was a legitimate topic of public interest.
Relatively few directors receive very large sums, just as fairly few actors and sports performers get millions. But such directors are responsible for some of the world’s largest and most successful enterprises. It is remarkable that they tend to be singled out for vilification rather than praise.
On the other hand, there is some evidence from published corporate reports of absence of a clear link between remuneration and performance. Academic research has repeatedly shown that there is, at best, a weak statistical association between corporate performance and directors’ remuneration.
The IoD has suggested that more should be done to devise challenging criteria to link performance to pay, especially over the long term.
Businesses have to take into account any public criticism of the pay and performance link, even if based on poorly presented information. The IoD agrees with the government that there is substance in the criticisms of excessively detailed remuneration reports. There is also an argument that increased disclosure has almost certainly led to peer pressure to level up remuneration.
Remuneration committees made up primarily of non-executive directors are to be encouraged. They would be wise to take advice on pay levels.
But there is a big difference between this and the idea of setting up some sort of representative body of outside institutions, individual investors, NEDs and employees.
To be sure, organisations should be free to set up whatever structures they feel would be useful in maximising the performance of the body as a whole. The opportunity costs would need to be considered. It is far from clear what such new representative structures would achieve.
More importantly, just because a decision may be difficult, does not imply that directors should effectively abrogate or dilute some of their responsibility. A remuneration committee is a sub-committee of the board, and it can and should do its job.
Directors have a duty to their shareholders to account for the performance of their organisation. Sometimes this can be tricky. However, directors’ pay is but one of a number of matters that can affect corporate reputation and, ultimately, success or failure.
– Geraint Day is business research executive, Institute of Directors, and an NED in the retail sector.