Companies should consider voluntarily complying with BEIS proposals on director pay and employee power, says legal expert Nicholas Stretch

While there is still some time to wait before the government publishes its own proposals on directors’ pay in quoted companies, the Business, Energy and Industrial Strategy (BEIS) Committee has hit the headlines with its own proposals on the subject. The most eye-catching are plans to phase out long-term incentives in their current form and to have employee representatives on their directors’ remuneration committees.

The overriding goal is to achieve greater popular support of the UK’s pay processes for directors and the results they deliver. The committee sees current arrangements leading to unjustified high levels of remuneration.

LTIPs in the firing line

Long-term incentive plans (LTIPs) have been the main delivery vehicle of remuneration for some time. In targeting LTIPs, it is not exactly clear what the committee has in its sights. It seems to be opposing not only the free share arrangements that have become known as LTIPs since the mid-90s, but also market value options for executives. The committee favours replacing them with what it calls ‘deferred option’ arrangements. These appear to be what many people call ‘restricted shares’ or ‘restricted stock units’. They are also free share schemes, but participants simply need to remain in employment to receive the shares rather than meet the additional corporate performance conditions that are a feature of LTIPs. In return for not needing to meet performance conditions, executives normally receive lower levels of award. Another recommended feature is that shares are received over five years, rather than at the end of a three-year period.

If taken up, this could lead to a radical change in executive pay in quoted companies in the short to medium term. The committee’s recommendation seems just to restrict companies adopting new LTIPs, rather than require them to jettison existing schemes before they reach their expiry date (which is normally 10 years after adoption). However, if there is a general shift, companies may feel the need to understand restricted share plans, introduce them (probably with the need for shareholder approval) and probably change their remuneration policies to implement this change – all in very short order. While several investors and investor bodies have reaffirmed their opposition to LTIPs, such is their near universal use at the moment that the silent majority is likely to prevail for some time yet while more thought goes into alternatives.

Employee representatives on remuneration committees

The second main proposal is an ‘optional’ proposal to put employee representatives on remuneration committees. The committee wants the UK Corporate Governance Code changed to allow for this, and expects ‘leading’ companies to adopt this change in approach, although it will not be compulsory. It matches this with other proposals to involve employees more in the governance of companies. Again, this is not a new proposal, and what a representative would do (it seems unlikely a vote would be given, or that this person would be a director) is unclear. It would certainly be as dramatic a change as a move away from LTIPs. In remuneration committees, there is currently a debate between directors and their advisers who are well-versed in pay matters, and all are generally comfortable in talking about remuneration levels. This would completely change.

Other proposals include:

  • Chairmen of remuneration committees should resign if more than 25 per cent of shareholders disagree with their ‘proposals’.

  • FTSE 100 companies should publish workforce data broken down by gender, ethnicity and pay band.

  • Pay ratios comparing the salaries of the CEO and senior directors with those of the workforce should be published.

The direction of travel is clear. Whether the government takes up some or all of these proposals, the relevant ideas are now gaining sufficient traction that every remuneration committee should be asking whether their company should be considering volunteering some changes. Some companies will be happy to embrace the changes. For others, the end result will seem painful and costly.

Nicholas Stretch is a partner at CMS Cameron McKenna