Experienced RemCo member and Chair Moni Mannings and Mercer’s remuneration expert Amanda Flint contributed to a discussion on the challenges of being involved in a Remuneration Committee at our Directors Circle dinner, 29 Jan 2019

The Remuneration Committee’s task of setting the organisation’s compensation policy and making individual awards poses a delicate balancing act. Committee members can find themselves under competing pressures from inside and outside the organisation. Scrutiny of the decisions made can be both passionate and high profile. Getting it ‘wrong’ can lead to senior resignations and reputational or recruitment problems. It is vital that those joining a RemCo, as the committees are known, understand the complexities of multiple stakeholders across both the internal and external environments.

The challenge of incentivising senior staff appropriately can be complex. Many RemCos are now looking beyond simply rewarding delivering outputs but also prioritising culture.

Firstly, there is clearly a financial balancing act in offering desirable but affordable incentives. Moni Mannings pointed out that this can cut both ways. Her experience with a charity’s RemCo has required thinking beyond financials, as the charity cannot simply offer a large payment. On the other hand, she has also worked on a RemCo of a company whose senior management had made very significant personal gains from taking the organisation public, so financial incentives became less meaningful.

The challenge of incentivising senior staff appropriately can be complex. Many RemCos are now looking beyond simply rewarding delivering outputs but also prioritising culture. As Amanda Flint put it, “If someone has achieved their targets by bullying their staff, should they still reap heavy financial rewards?” With the Financial Conduct Authority (FCA) scrutinising how firms manage misconduct of all types, RemCos in the financial services world need to be even more mindful that they are not rewarding poor behaviour, whilst their executives, in general, strive to create a more positive performance culture.

Beyond these more obvious challenges, those sitting on RemCos highlighted the highly emotive mix of expectations that are the real balancing act. Executives understandably have strong views on their reward, as do most people. Finding out in advance how an executive is likely to react to their compensation package makes it easier to manage their ‘in-the moment’ response effectively. Obviously this is particularly pertinent if it likely to be seen as ‘bad news’.

However, what an executive may see as ‘good news’ for them personally, can cause controversy with the wider employee base. That is one reason why so many firms are now involving employees at board level, for example Sports Direct and M&S. The way of doing this varies considerably, including: having an employee on the board but not involved employees at the committee level; having a committee of employees who feed into the board; or holding an employee AGM where staff meet with the non-executive directors in relatively small groups. This improves transparency and engagement within the organisation, which supports understanding over top executive pay.

With a string of scandals reported by the media portraying over-remunerated ‘fat cats’ alongside failing businesses, there is a role for RemCos in championing the positive impacts of corporate UK has on society.

RemCos also need to bear in mind how pay awards will appear to wider stakeholders. Top talent will be looking to companies which reward well. Yet shareholders will question over-generous awards, which are also increasingly off-putting to the customer base. With a string of scandals reported by the media portraying over-remunerated ‘fat cats’ alongside failing businesses, there is a role for RemCos in championing the positive impacts of corporate UK has on society. Board Chair’s and RemCos should consider engaging corporate PR teams early. With CEO pay ratio reporting expected for companies who employ more than 250 people, from January 2019 onwards, boards are really going to have to improve their messaging and engagement with employees generally, alongside managing their gender pay gaps.

Finally, for those of you that are Chairs of the main board, it is not just the executives that you have to worry about as regards to compensation. No doubt you are asking your NEDs to take on lots of extra reporting responsibilities so they are very likely to be pushing you also for changes to their non-exec compensation packages, particularly those with international experience. Non-executive payments are lower in the UK than the US, for example, as the high level of competition for roles in Britain keeps the fees modest. After all remember, it’s the chair and executive team who set non-executive payments not the RemCo committee.

So remember if you join a RemCo you need to be confident in your own judgement whilst at the same time listening hard to all your stakeholders; executives, employees, shareholders, customers, and the media not to mention your fellow board colleagues who will also be scrutinising your work!