Oral evidence: Corporate Governance: Delivering on fair pay, HC 928
Oral evidence, 6 June 2018.
Witnesses
Charles Cotton, Clare Chapman and Marion Sears.
Chair
Thank you very much for coming to give evidence to our Select Committee today on corporate governance, focusing on executive pay. We have two evidence sessions this morning. The first will last probably about an hour. We have quite a lot of questions to get through. I will start off, if I can. My first question is to you, Charles Cotton. How would you summarise the changes we have seen in the last 12 months on executive pay? Do you think there have been any changes in attitudes from boards or remuneration committees when setting executive pay?
Charles Cotton
If you are looking at pay levels, we note that in 2016 there had been a significant fall. However, our initial analysis for the financial year ending 2017 shows quite a significant increase again. It is too early to say whether that increase will then be carried on into 2018. In terms of the levels that are being paid, there has been a movement back.
Chair
Do you want to give us an idea of what those levels are and the sort of increase we have seen in the last couple of years?
Charles Cotton
We estimate the increase that happened in 2017 was around a fifth. It can be influenced by the make-up of the FTSE 100. In June, you saw two new entrants, and one of those organisations had a significant, large LTIP payment for its top four individuals.
Chair
What is the average pay of a chief executive for a FTSE 100 and a FTSE 250 company?
Charles Cotton
For a FTSE 100, it is probably going to be a few million. For a FTSE 250, we do not look at that.
Chair
When you say a few million, that is quite a range. Do you know what the average pay is?
Charles Cotton
Yes, I have the figures here. I was trying to do it off the top of my head. I think the figure was—
Chair
I think it is about £3.5 million.
Charles Cotton
Yes, £3.5 million. If you are looking at the average, it went down to £4.5 million in 2016.
Chair
Do you think that levels of executive pay are about right, too high or too low?
Charles Cotton
We believe that there are a number of issues with executive remuneration. One is how you define a successful organisation. Predominantly, it is focused on financial measures, which can be equally important as people measures, such as employee turnover, commitment or engagement. Another issue we have is the assumption that the only people who have actually achieved that success are those at the top of the organisation, a handful of individuals, rather than seeing performance as a collective endeavour, and that the only way you can really incentivise these individuals at the top is by giving them barrel-loads of money.
Chair
We are going to come to a lot of these issues in more detail, but overall, in your assessment, are the levels of executive pay we see at the moment about right, on the high side or the low side?
Charles Cotton
It is subjective but, if you look at how executive pay has performed against the pay of typical employees, it has increased very greatly. It is not in line with that. It is not in line with the growth in the economy. It is not in line with the growth in productivity. Yes, on those measures I would say that executive remuneration is too high.
Chair
What would your view on that be, Clare Chapman and Marion Sears?
Clare Chapman
If I put my hat on for the purpose of a company that has made a submission, using the PwC data, if you look over the last five years at the FTSE 350, in actual fact there has been pretty much stability in executive pay levels. It has not risen significantly and has not outstripped employee pay. Now, there have been outliers in all of that, but broadly speaking pay has been flat. I would also make the comparison, for those of us who are working in multinational businesses, that UK executive pay is broadly speaking about 30% to 40% lower than in the US. For those of us who are trying to attract the talent needed to grow multinational businesses, we need to be mindful of an international environment. Pay excess is never right. It is the responsibility of remco chairs to make sure we never pay a penny more than is needed to ensure the right long-term performance for the business, but there is not the evidence that it has been excessive over the last five years.
Chair
It has gone up compared to average pay in the UK and, indeed, the US.
Clare Chapman
If you look at the PwC data for the FTSE 350 over the last five years, it has not outstripped employee pay. Given that inequality after tax and benefits has fallen since the financial crisis, but there has been a failure in the rise of average living standards, I am sure that is not how it feels for many individual employees. But the longitudinal data of the FTSE 350, particularly over a longer timeframe, shows what the levels of increase have been.
Chair
You are a non-executive director and chair of the remuneration committee at Weir, and I think at Kingfisher as well.
Clare Chapman
Correct.
Chair
At Weir, what is your chief executive paid?
Clare Chapman
The chief executive at Weir is paid £600,000 to £700,000.
Chair
What is the total pay that he took home last year?
Clare Chapman
I will need to get you the single-figure number.
Chair
This is what you were coming in to give about evidence today. Maybe you could help me, Marion Sears? What was the chief executive paid last year and the year before at Persimmon?
Marion Sears
In the 2017 accounts, it shows that he was paid £675,000 and it was a 2% increase, in line with the workforce, on the year before.
Chair
What about total pay?
Marion Sears
In the 2017 accounts, it included the first vesting of the Persimmon LTIP and the pay was about £45 million.
Chair
What is the average worker at Persimmon paid?
Marion Sears
I do not have that figure at my fingertips, but I am happy to talk about Persimmon as a special case.
Chair
You are chair of the remuneration committee at Persimmon, are you not?
Marion Sears
I have been chair since December last year.
Chair
You do not know what average pay is, as chair of the remuneration committee.
Marion Sears
Up until now and since I have been chair, I have been very focused on the Persimmon LTIP problem that we have had. I have been working flat out on that. Since the new FRC requirements coming in that will require remcos to have responsibility for wider pay, we are going to start a big piece of work on all of this in remco next month.
Chair
Is one of the reasons that people are unhappy about the £45 million that was paid to Jeff Fairburn because the success of a company reflects the work of everybody and, in the case of Persimmon, the Government Help to Buy scheme? Is the pay of the average person in the organisation not quite pertinent to the issue of pay at the top of an organisation?
Marion Sears
Yes, it is, but this is such a special case that it is an irrelevant multiple. I have looked at pay ratios.
Chair
It might not be that irrelevant to somebody doing an ordinary job at Persimmon, might it?
Marion Sears
I completely agree.
Chair
You do not know that number. Maybe you can get back to the Select Committee with that.
Marion Sears
I can look it up now if you would like.
Chair
I would have liked you to be able to come with that information but, seeing as you do not have it to hand, perhaps you could get back to us with that information. Do you know whether Persimmon is a living wage employer?
Marion Sears
Yes.
Chair
It is a living wage employer. What does the lowest-paid person in your organisation get? Is it the living wage or is it above that?
Marion Sears
I do not look at it like that from a macro point of view. The first question I ask is: do we comply? Is everybody paid the living wage? The answer is yes. Then we look at the real living wage. If you include all pay for all of our staff, almost all—I think it is 97%—are on the real living wage, which is higher, and I am pleased about that.
Chair
You are not accredited by the Living Wage Foundation, then.
Marion Sears
No, we are not accredited, although we are talking to them about the possibility of that.
Chair
You would have thought that an organisation that can pay £45 million to its chief executive might be able to afford to pay the living wage to everybody in the organisation. Would you not think that?
Marion Sears
I agree, and we are talking to them about that at the moment.
Chair
It would be good to have back from you the ratio between the top and bottom person in the organisation, and between the top and the middle, for the year that the pay of £45 million was made to your chief executive. Clare Chapman, do you know what the average person in Weir Group is paid?
Clare Chapman
The ratio depends on what the criteria, which have not been published yet, are going to be, but it is approximately 20 to one.
Chair
Are you a living wage employer at Weir Group?
Clare Chapman
We are, yes.
Chair
Do you think that, when pay is set, it should just be left to the market or do you think that companies have a wider responsibility to society? I will maybe start with you, Marion Sears.
Marion Sears
Companies definitely have a wider responsibility. The most important thing is to get the basic salary right, and then the piece around it correct, with the appropriate discretions.
Clare Chapman
Absolutely, you have to get the pay right, at all levels. Weir is an engineering company. It has a proud heritage of 150 years. We want to be around for another 150 years. The reality is that you need to make sure you get the pay right to do that.
Chair
I have another question to ask, while you are here. We took evidence a couple of weeks ago as a Select Committee on the gender pay gap. What is the gender pay gap in your organisation?
Marion Sears
For the group, as opposed to the statutory, because that is a more meaningful way to look at it, the median hourly rate for Persimmon group is 8%.
Clare Chapman
For Weir, it is 10%.
Chair
What proportion of women do you have in the top quartile?
Clare Chapman
I would need to go back and look at the particular statistics for that. The reality is that, if you take a look at Kingfisher, from recollection about seven of the top executives are women, including the chief executive, the finance director and the commercial director. In different businesses, the profile looks different. As an engineering company, one of the things we are putting a lot of focus on is bringing more female engineers into the business.
Chair
Do you know, Marion Sears?
Marion Sears
Yes. Was it females in the upper quartile you wanted?
Chair
Yes, that was one of the things you had to publish with the gender pay gap.
Marion Sears
It was 18%.
Chair
Okay, so it was 82% male.
Marion Sears
Yes.
Chair
I think there was just over £100 million shared between three people at Persimmon. Were any of those who get those very large pay‑outs women?
Marion Sears
Not of the top three, but the scheme covered 133 plan participants. I do not know the exact number, but there are certainly senior women in that.
Chair
Maybe you could get back to us with that as well. We will move on to the next question. Some of these issues will come up later during the session.
Drew Hendry
Perhaps I could ask Clare Chapman and Marion Sears before coming to Charles Cotton on this one. Do you see shareholders as a whole taking a tougher line on executive pay this year?
Clare Chapman
Yes. There are two ways of answering that. As the Weir Group, this year we have taken quite an important policy change to our shareholders and to the proxy agencies. I have seen a high level of engagement in helping us to get that design right. There are two features of that. A lot of the large shareholders in Weir have been shareholders for a long period of time. They are engaged, they are informed, and therefore you can have a very, very constructive dialogue. In my experience, yes, investors have been very engaged. I would expect that, given we have taken quite a big—
Drew Hendry
Will they be tougher?
Clare Chapman
They were certainly challenging conversations. My observation, looking at the AGM season more generally, is that investors have certainly been tougher on annual salary increases, as well as ensuring that there is a strong relationship between pay and performance.
Marion Sears
I do not find them tougher. The shareholders that I have dealt with, for the various companies I have been on the board of, have been very informed and very engaged for some years. I do not find a change, but I have had a lot of engagement with shareholders recently, in the context of this.
Drew Hendry
You do not feel that executive pay will be an issue for your shareholders going forward.
Marion Sears
Executive pay is absolutely an issue, but I do not feel it has changed in the last year. It has been an issue for three or four years now.
Drew Hendry
You cannot see that environment being tougher.
Marion Sears
I do not think it can get tougher. The scrutiny is very high, appropriately high, and it is hard to imagine it being higher.
Charles Cotton
We would like to see investor scrutiny not just focused at the top level but looking throughout the whole organisation at how people will be rewarded. What behaviours, skills and attitudes are being rewarded? Why are they being rewarded, and how? Is that reflective of the purpose of the organisation? Too often, there is a focus just at the top, ignoring what is going on in the rest of the organisation, which can lead to corporate scandals in the near future.
Drew Hendry
Is the combination of binding votes on pay and advisory votes on pay reports effective? Are companies listening and responding to shareholder concerns?
Clare Chapman
I am on a remuneration committee in the United States as well as two in the UK. Interestingly, if you look across a long period of time, on pay, it has had an effective role in putting more discipline into some areas of executive pay. An example would be around disclosure. On most annual bonus schemes now—for about 90% of the FTSE 100—there is retrospective disclosure of bonus targets. That is a good thing, because it enables a much more open dialogue between shareholders and companies around where the targets are put at appropriate levels. I think the scrutiny has had an impact.
Marion Sears
I agree. The structure of the three-year policy vote and the annual advisory vote works quite well. When you are working in an approved policy, you have grid lines that are clear and they are clear to everybody. That is helpful.
Drew Hendry
Sticking with Persimmon, what lessons has Persimmon learned from shareholder dissent?
Marion Sears
The lesson we have learned from the whole pay debacle is that there should be remuneration discretion for undesirable outcomes. That is probably No. 1. We would have handled it better if we had had earlier and more joined-up communication with shareholders. Our communication was right in the end, but it was late and that was not good. Thirdly, it has reaffirmed for me something that I already knew and strongly believe in, which is that any remuneration policy structure, whatever it is—LTIP, bonus, restricted stock—if it is designed to ensure that management own as many shares as possible for as long as possible, that has to be a good thing.
Drew Hendry
You mentioned you felt that Persimmon was late in getting the message out. How do you mean? What timescale are you putting on that?
Marion Sears
We only really engaged properly with shareholders after the chairman and remuneration committee chair resigned.
Drew Hendry
After the event?
Marion Sears
No, after our chairman and remco chair resigned. I became chair in December. Then there was a lot of engagement, and our AGM, where it was voted on, was in April, this last month.
Drew Hendry
Weir Group, what was your experience of engaging with shareholders and driving through change in policy on pay? What obstacles did you come up against and how did you overcome them?
Clare Chapman
Golly! We engaged very significantly with shareholders because, by moving to a policy based on deferred shares and up to seven years of pay-out, that was consistent with what this Committee recommended, but different to what was happening significantly within the FTSE. One of the things we did was a lot of consultation. We did some very detailed consultation with the Investment Association, our big shareholders, ISS and Glass Lewis right at the very beginning of the process, where we started to share our thinking. They helped us shape the recommendations, but we then took them out into a much broader consultation with our larger shareholder base. That resulted in over 92% support at the AGM. My observation would be that investors put time into the consultation, and at the beginning of that our big shareholders particularly helped us do some thinking about the shaping of the design itself. In terms of barriers, there are two very significant ones, which I am sure you will hear from those giving evidence. First, there is a very disparate set of views among shareholders, particularly those shareholders that are more US-based, versus shareholders that are more UK-based. Often, that fragmentation of views among the shareholders makes it difficult for companies to know exactly what is being asked for by the shareholder group.
Stephen Kerr
First of all, Charles Cotton, what is best practice in terms of the split between salary and potential bonus awards?
Charles Cotton
Common practice among the FTSE 100 at the moment is that about half of all remuneration is through the LTIP, and a further 25% is through bonuses. Looking at the evidence from behavioural science and behavioural economics, we would suggest that, rather than relying on LTIPs, which are too big, reward the wrong things and demotivate the rest of the workforce, organisations would probably be better off looking at smaller, more immediate cash bonuses and using those.
Stephen Kerr
Salary is 25%, bonuses are 25% and LTIP is 50%. Is that what you are saying? That is the breakdown.
Charles Cotton
Yes. Salary is about 20%, and then the pension and the benefits represent the difference.
Stephen Kerr
You mentioned the demoralising effect of an LTIP on the workforce. Can you expand on that?
Charles Cotton
The CIPD did some research a couple of years ago and we found that 60% of employees reported that the high levels of executive remuneration had a demotivating effect on them.
Stephen Kerr
They felt they were doing all the work and someone else was getting—
Charles Cotton
Yes, someone else was getting all the money. That is why we think there are a number of issues when you are making decisions about executive remuneration, taking into consideration the efforts of the rest of the workforce, what they are getting paid, as well as what the evidence out there shows about the impact that these systems have.
Stephen Kerr
The TUC has suggested there should be a 10% limit on the total amount of pay that is subject to incentives. What would be the effect in terms of recruiting top talent to this country, if that kind of idea took hold?
Charles Cotton
There was some research carried out by the LSE a few years ago that found there was not a difficulty in terms of recruiting and selecting top talent to organisations; there were lots of people out there. I am not sure. It may have an impact on recruiting talent from overseas but it would not necessarily have an impact on recruiting talent within the UK.
Stephen Kerr
Unless they went overseas.
Charles Cotton
Yes.
Stephen Kerr
Should it be left to the companies themselves to make the decision about the split? We are not talking about the magnitude of the total pay-out; we are talking about the split.
Charles Cotton
Yes, organisations should think about, in their circumstance, what a reasonable split would be to incentivise and recognise the achievements of both the individual and the organisation as a whole, and have discussions on that with the investors. Of course, we have to have a mindset change among the investor community, to start thinking more broadly about how success is achieved within an organisation. It is not just about the financial measures, such as profit and earnings per share, but it is about the contribution of employees.
Stephen Kerr
You are alluding there to my next question, which is about whether bonuses should relate to financial performance—whether they should be narrowly focused on those types of metrics, or whether there should be a broader set of indices against which these payments are made. What is your view on that?
Charles Cotton
Definitely broader, yes, because earnings per share, revenue and profit are very important, but they are outcomes of people are managed and developed within the organisation.
Stephen Kerr
One of the interesting statistics that comes out of the Purposeful Company’s work is that only 15% of FTSE 100 companies include customer satisfaction as a bonus objective. That is quite remarkable, is it not?
Charles Cotton
Plus the fact that that will probably be 10%, 15% or 20% of a bonus, so it is quite small overall.
Stephen Kerr
You do think that other considerations such as customer satisfaction should be included in this, and should be a bigger, meatier part of the incentive package.
Charles Cotton
Absolutely, yes. I could not agree with you more, especially in safety critical industries. We have seen more stuff around accidents, which is great, but why can organisations not report more on how they are managing their people?
Stephen Kerr
When you ask why they cannot, should the Investment Association and the FRC take a more direct involvement, maybe taking a lead on all of this?
Charles Cotton
Yes, they should be challenging the CIPD.
Stephen Kerr
Challenging or doing more than challenging? There is lots of challenging going on at the minute.
Charles Cotton
Yes. They should say that more information should be reported. The question is how and what. The CIPD as an organisation is carrying out research into that. In the next few weeks, we will be producing a framework to help organisations report on their people, because we have found that there is very little reporting of people and their achievements. If there is anything, it often tends to be a PR puff.
Stephen Kerr
Let us turn to the companies now. What lies behind this? What is your motivation when you design bonuses for senior executives, Marion?
Marion Sears
There are two things, really. One is to incentivise and one is to focus the mind on the right things: the things that the board together wants the company to achieve.
Stephen Kerr
Flesh that out a bit. Is that financial, going back to the previous discussion?
Marion Sears
You made the point about customer satisfaction. We call it customer care at Persimmon. For the last four years, it has been a bonus part. It is very important to us. As part of the new change we have had since the pay row, as it is known, we have increased the proportion of the bonus that is paid for customer care going forward.
Stephen Kerr
You have published all that, have you?
Marion Sears
Yes. It is in my chairman’s letter. That is an example of symbolism, to show what the board collectively wants to achieve.
Clare Chapman
Broadly speaking, similar to Marion, it is about incentivising the long-term value creation you want and the behaviours you want. Within Weir, we have made a very significant change of our annual bonus scheme, and 30% of the annual bonus is tied to the improvement of what we call strategic measures, which would include customer, innovation, technology: those things that we know will drive future earnings. We have made a very significant change in that direction. We have done something very similar in Kingfisher, where we halved annual bonuses but we tied the delivery of them to the strategic milestones, which in effect are improving the underlying businesses. In Weir, we have moved the long-term incentive programme to be deferred shares, which are paid out or vested over up to seven years. It is very much a case of rewarding executives in the same way that you would be rewarding investors.
Stephen Kerr
What part does customer satisfaction or customer care play? Are staff surveys and engagement surveys part of it?
Clare Chapman
Indeed.
Stephen Kerr
Is it a meaty part, though? As Charles Cotton was saying, is it a percentage of a percentage of a percentage?
Clare Chapman
Inevitably, there is some percentage of percentage, but the big headline message from me on both Kingfisher and Weir is that, within the Weir Group, those strategic measures including customer satisfaction and employee satisfaction are 30%; within Kingfisher, the strategic milestones drive 100% of the annual bonus. Much more focus is on the improving of the underlying fundamentals in the way you are saying.
Stephen Kerr
I have a question here, which is kind of the litmus test question to all of this discussion we are having. To what extent does all of this actually influence the decisions and the behaviour of senior executives?
Clare Chapman
There is a lot of evidence on this area, and some important emerging evidence in the Alex Edmans and Purposeful Company data you have seen, which is that, when you give executives cliff-edge targets, such as the traditional LTIPs, they tend to drive to the target, which can lead to short-term behaviour. It is another important data point that reinforces where this Committee came to before, which is that deferred shares vesting over a long period of time are much less likely to get the unintended consequences of driving short-term behaviours.
Stephen Kerr
Are investors and shareholders not looking for short-term results? Is that not one of their prime drivers? How do you persuade those investors to move away from supporting short-term, dash for growth type objectives towards this more patient, long-term approach? How do you do that?
Clare Chapman
Partly, it is through making sure that you get your share register aligned with what the purpose of the company is. I mentioned before that in the Weir Group, from recollection, our biggest shareholders have held our shares for approximately eight years. That suggests that those larger shareholders have a long-term interest in the long-term value of the company. One of the important responsibilities of the Board is to align that share register with the strategy of the company.
Stephen Kerr
Is that what went wrong at Persimmon? Did you have the wrong sort of investors?
Marion Sears
No, we had the right sort of investors. What went wrong was that we had an incentive scheme that was a contractual entitlement without any discretion or cap. The company did very well; it was actually a stunning business performance, but that gave rise to a total shareholder return and share price performance that resulted in sizeable outcomes in terms of value for the executives.
Stephen Kerr
Customer satisfaction is perhaps not a key factor in that package of levers.
Marion Sears
Customer satisfaction was 10% of the bonus until just recently, and we have increased it. We have now put 30% of the bonus going forward on non-financial metrics. Customer care particularly is half of that, but the other half is made up of people-related things.
Stephen Kerr
Snagging lists are part of the calculation.
Marion Sears
Every customer is important in that respect.
Stephen Kerr
What about the strength of link between executive bonuses and those for employees? It was alluded to earlier by the chair when she opened the questioning. Marion, would you like to continue on the link between executive bonuses and bonuses for employees?
Marion Sears
In an ideal world, you have a cascade down, a mirror image structure. That is the way that the guidance is going. It is the best way to run a company. At Persimmon, we put the bonus structure in for the executives. Up until now, it has been the executives’ responsibility to implement the bonus going down, but they have waited to see what we did at the top and then mirrored it to some extent, as they think appropriate, within the business. It will be changing and remco will have more responsibility in this area in the future.
Stephen Kerr
Should there be a stronger link with executive bonuses?
Clare Chapman
Yes. There needs to be strong evidence that all employees can share in success. That is the headline on that. The executive proposals we just had approved at the AGM included a new share scheme for all employees.
Peter Kyle
Marion, executive pay has increased in the last decade by a very large margin. Why have remco chairs been so ineffective at restraining executive pay?
Marion Sears
In some cases they have, and in some they have not. I have administered two LTIPs where, in one case, the executives got paid well because the business performed very well and, in another case, the business did not perform so well and the executives did not get paid so well. There are always outliers. If you are referring to Persimmon, that case is an outlier, as I have explained.
Peter Kyle
Clare, if you look at the pay since the financial crash for the bottom 20% of private sector workers, it has not kept pace with the cost of living. When you look at executive pay over the same period, it has increased exponentially. It is not just a fact that executives are better at pay negotiation than you are as remco chairs? You are not able to keep pay restraint for the people you have oversight over to the same degree that the executives you are monitoring are over their own workers.
Clare Chapman
As I mentioned before, there are examples of what you are talking about, Peter. I acknowledge that but, broadly speaking, if you look at all the data, there is not the evidence that executive pay is outstripping employee wage increases. As you will have seen, another one of the hats I wear is that I am on the Low Pay Commission. I would absolutely concur with your view that attention needs to be given to the pay at the lower end. The changes made in the living wage and minimum wage are a very, very important part of that. Broadly speaking, attention is needed at both ends of the pay scale. I do not think there is broad evidence that there is a big outstripping at the top end versus the bottom end. There are examples of that but, if you look at the last five years, there are not extreme examples of it.
Peter Kyle
Marion, do you have an answer to that? It is a fact that, for the bottom 20% of private sector workers, the pay increase has not outstripped the cost of living. It is also a fact that it has done for executive pay. Why are your executives better at pay negotiation than you seem to be as remco chairs?
Marion Sears
It is different in every company, but one thing that has changed in the remuneration landscape in recent years is the need for discretion, clawback and malus. If you were to talk to the remuneration consultants, they would tell you that every remco chair in the land is coming to them to ask about discretion wording for bonus and LTIP policies, and what is called malus and clawback. That is harder, because you are trying to get money back after it has been paid.
Peter Kyle
What benchmarks do you use for your organisation when you are hiring? Is it the medium for the industry and the sector?
Marion Sears
When we are hiring?
Peter Kyle
Yes. Sorry, when you are negotiating pay, setting pay levels and remuneration levels for executives.
Marion Sears
For an existing executive who is there, they are on a package, and the guidance we would always look to is how much the workforce pay is going up. If workforce pay goes up 2%, we would expect to give the executive the same for their basic salary.
Peter Kyle
You do not pay to industry averages.
Marion Sears
No.
Peter Kyle
Clare, is that the same for you?
Clare Chapman
We would be informed by them but, to your earlier point, higher pay for scarce skills is a feature of our economy. If you take a look at executive pay, I do not think it is going up any more quickly than other high-skilled professions like law, finance, media or sport.
Peter Kyle
It has a higher starting point.
Clare Chapman
It has a higher starting point, and that is why we would always be informed by external benchmarks but, equally, we would be informed by internal benchmarks as well, because we want to ensure there is some connection with what we pay internally as well as with the external benchmarks.
Peter Kyle
The reason we are asking this is because several of us on this Committee sat on the Carillion inquiry. The Carillion remco was pegging to medium pay; it was pegging to medium pay in its industry. Of course, all the while, the company was disappearing from under their feet. We are looking to see why that could happen and whether that is widespread. Looking at testimony today, I am not sure we see something fundamentally different from the Carillion experience. Would you disagree with that?
Clare Chapman
Let me take a real life example. Within Kingfisher, when the new chief executive was appointed, we appointed at a pay that was less than a predecessor and less than industry benchmarks, recognising the experience level of the individual. We would want to move her closer towards industry benchmarks as she demonstrates delivery and experience. You will see that appointments are often made very mindful of the experience that individual brings to the role, but also mindful that these are scarce skills in a highly competitive environment. In many of the organisations that remco chairs sit on in the FTSE 100, the reality is that you are competing outside of the UK as well, so you need to be mindful of those benchmarks.
Peter Kyle
Most of the questioning you are getting from our Committee today is your ability to push back on high demands for executive pay. What is the opposite? What are the obstacles to pay restraint? Where is the pushback to you when you are trying to achieve restraint in executive pay, Marion?
Marion Sears
I am not sure I understand your question, sorry.
Peter Kyle
We are questioning you on where you are pushing back on executive pay. Where is the opposite coming from? Where are the obstacles to you restraining executive pay? Where is the pushback coming from? Is it the executives themselves who are coming to you and demanding higher pay?
Marion Sears
No—
Peter Kyle
If there was no push for you for greater pay, there would not be any increases.
Marion Sears
I am thinking of when you appoint a new executive versus when you have somebody in post. When you appoint a new executive you have the boundary of your existing approved policy, so you can only go in that, but when you run a search and are looking at new candidates you have to take into account what you have to pay to get them. That then sets the pay going forward.
Chair
One of the issues around the role of non-executive directors is how much time they have to devote to their different roles. Clare Chapman, how much time do you devote in an average week to Weir Group?
Clare Chapman
I joined the board in the middle of last year and, in the period of time to get to the new remuneration policy, I must have invested about 100 hours. When you are going through a new set of policy recommendations, it is very time consuming. I am not sure quite how that converts into days per week, but it would have been at least one or two days a week while we were going through the development of the policy period.
Chair
What about the time you devote to Kingfisher?
Clare Chapman
When we were going through the policy period, it would have been very, very similar. Because of the transformation that Kingfisher has been doing, it has been very time consuming for the non‑execs as well. Among all three of the boards I am on, that is probably close to five days a week.
Chair
In addition, you are on the Low Pay Commission, the co-chair of the Purposeful Company and also a trustee of Lambeth Partners. Do you not sometimes worry that you are spread too thinly across different organisations?
Clare Chapman
Absolutely not. Being a remuneration committee chair is very time consuming and, as you have seen, there is a lot of complexity to hold on to. Doing more than three would be difficult, but doing three is perfectly possible.
Chair
Marion Sears, how much time do you spend at Persimmon?
Marion Sears
Since December when I became remco chair, I worked almost full time until the AGM in April. That goes with the territory. On a normal basis, I would imagine, if you are on the board of a corporate and chairing a committee, you should allow a day a week, perhaps.
Chair
You are also a non-executive at Dunelm, WA Capital, Fidelity and Aberdeen; is that right?
Marion Sears
Yes. Fidelity and Aberdeen are investment trusts. They are not the fund management houses.
Chair
How much time do you spend in your role as a non-executive for those organisations?
Marion Sears
The investment trusts are less because they are not operating companies; they are simply investment companies. There are four meetings a year. Dunelm is an operating company and, in my head, I would say a day a week, but I am not on any committees there so in fact it is probably a bit less.
Chair
What about WA Capital?
Marion Sears
That is a full day. It is a private firm.
Chair
You do not worry that you are spread too thinly.
Marion Sears
No. The fact that I put all the time into Persimmon when we had the issue shows that I could deal with that.
Mark Pawsey
I think we all agree that greater transparency and more effective reporting would be beneficial. The Government would certainly like to see that and made that clear following the previous Committee’s report. Charles, have you seen any evidence of better-quality reporting?
Charles Cotton
We would like to see more use of graphics and charts in the committee reports. They can be quite wordy.
Mark Pawsey
In the committee reports?
Charles Cotton
Sorry, in the remuneration reports that are voted on. It can be difficult for the common man and common woman to understand what is going on.
Mark Pawsey
Are they made deliberately complicated, in your view?
Charles Cotton
I am not sure they are deliberately made complicated; they are dealing with complicated issues.
Mark Pawsey
Does it not suit some companies to dress it up in very complicated terms that people have to wade through to get there, so they perhaps lose the will to do that or maybe do not understand?
Charles Cotton
I would not know. The challenge is that they are trying to deal with long-term incentive plans, which are very complex and can be at times opaque to explain. That was one of the criticisms that I had earlier. If we did not have long-term incentive plans, it would probably be a lot easier to communicate what the organisation was rewarding and why. But I would not say that organisations are deliberately going out of their way to make their reports as complicated as possible.
Mark Pawsey
It is just a by-product of the system we have.
Charles Cotton
Yes. They tend to copy what other reports look like as well.
Mark Pawsey
How do we effect change? How do we get change in the nature of reporting? How can we simplify it so it becomes much more transparent to everybody what is going on?
Charles Cotton
We would like to see more reporting on the people management aspects, not to make the report even larger, but to have a focus on those key elements, again using innovative graphics. Again, it is for the industry to push for better and more comprehensive reporting. The other challenge is more diversity of thinking. Again, we do not quite have the diversity that we would like to see in remuneration committees. Hopefully, if we did, we would see more remuneration reports that were more comprehensible.
Mark Pawsey
May I ask Clare Chapman and Marion Sears why you and other remuneration committees have allowed these bonuses and incentives to be so complicated? We identified in one report that it took 30 pages in order to explain what was happening. Why is it so complicated and how do we simplify things?
Clare Chapman
It is a really important question. I commend what the FRC has done in terms of laying out a new design for the strategic report, starting with a company’s purpose, going on to its strategy, looking at operating model and KPIs. Assuming that is done well at the front of the annual report, it becomes much simpler to use the remuneration report to say how we are using remuneration to bring about those changes. That will bring some simplification. The other thing is that, because pay with LTIPs did get very complicated, having good disclosure on that has led to reports becoming longer. One of the features of using deferred shares over long periods of time is that you significantly simplify the way you are doing reward. That will be reflected in reports. This year, the Weir report is much simpler as a result of it, albeit that we did put some extra pages in to reflect the nature of the conversation that we had had with shareholders.
Mark Pawsey
Claire Chapman would say the Weir report was better, wouldn’t she? Charles Cotton, do you believe it was better? Are you familiar with it? Did you recognise an improvement?
Charles Cotton
We focus mostly on the FTSE 100, so I could not comment but, yes, anything that makes it easier for people to comprehend is only going to be a good thing.
Mark Pawsey
Marion Sears, we have spoken about moving on to factors of other than purely financial factors. Is it not the case that some of those other factors are going to be more discretionary and judgmental? Is there a danger, in fact, that what we are already describing as very complicated and difficult to understand is going to become more so?
Marion Sears
Yes, it is incumbent on remuneration committees to keep the objectives that they set in the non-financial metrics simple enough so that the whole board agrees what they are focusing on. May I comment on your other question? The letter that the committee chairman writes at the beginning of the section is not prescribed. That should be the vehicle through which to say, on one page, in words, to a shareholder, what is going on. In the Persimmon report, I wrote it myself and it sets the record in one place. Then all the complexity can follow.
Mark Pawsey
That is an outline and an explanation.
Marion Sears
Absolutely.
Mark Pawsey
Is that adopted by everybody?
Marion Sears
Yes.
Mark Pawsey
Can I ask about the Investment Association register of shareholder dissent. Charles, is that having any impact? Are people paying attention to that? Is it too new?
Charles Cotton
It is relatively new but, yes, organisations are looking at it. Journalists and commentators are looking at what the votes are and what steps the organisations have been taking to engage with their shareholders.
Mark Pawsey
Are companies bothered about being on that register? Are Weir Group and Persimmon on it? Would they be bothered if they were?
Marion Sears
Persimmon is on it because of the last AGM.
Mark Pawsey
Is that a matter of concern?
Marion Sears
It is nothing to be proud of.
Clare Chapman
Weir is not on it. The feedback I have shared with the Investment Association is that the register is a good thing, but it should be far more focused on repeat offenders. There are already about 200 companies on it. The threshold is set too high. A special resolution only requires 75%. My advice to them would be to focus it more on repeat offenders and set the threshold at the same level as we would for approval for a special resolution.
Chair
Maybe you could have a red, amber, green thing, so over 25% you could be red, and between 15% and 25% amber.
Clare Chapman
To be honest, if you are demonstrating you are not listening to shareholders, that will flag you up as being a repeat offender. If there are two occasions where that is happening, going on the register makes a lot of sense. Having fewer companies makes it a really significant deal that you are on the register because of the reputational factors that come with it. When you have so many people on it, you run the risk that, if you are not being innovative, you are not on the list. That is one of the risks you have with the register in the way it is currently constructed.
Chair
There are two things you have raised. There is the 25% threshold and changing it to that. You also suggested you need to be on it for more than one year.
Clare Chapman
The recommendation we made through the Purposeful Company was about evidence of repeat offenders, so it would not be the first occasion; it would be the second occasion, if you are demonstrating you are taking resolutions that are not being supported.
Chair
For something like the Persimmon case where, if you do not mind me saying so, Marion, it was such an egregious example of a bonus pay‑out, would that not deserve to be on the list, even when it first happened? You would not want another £45 million pay-out to the chief executive before they got on, would you?
Clare Chapman
There may well be circumstances where you say it is a first-strike issue, but they would be very few and far between.
Anna Turley
Can I start with a really basic yes/no question for all three of you separately? Do you accept the fundamental principle that executive pay is excessive and is a problem that needs to be tackled?
Clare Chapman
Excessive pay is never appropriate and a remuneration committee should not pay a penny more than is needed to get the right talent in, but a board has a fiduciary duty to ensure it has the right talent to deliver the long-term value of the company. Therefore, you do need to pay the right amount to get that talent.
Anna Turley
I did not quite phrase that right. I did not mean to ask whether excessive pay is wrong, but at the moment is executive pay excessive across, say, the FTSE 100? Persimmon is in the FTSE 100, is it not? Weir is just looking to get into it.
Clare Chapman
Kingfisher is in the FTSE 100.
Anna Turley
Okay, so take the FTSE 100. Do you agree that there is a problem that pay is excessive in the FTSE 100?
Clare Chapman
All the evidence suggests that the issue is more one of pay design than pay quantum, except in the few instances of outliers where there is a quantum issue. We read about those regularly in terms of WPP and Melrose, et cetera, but within the bulk of the FTSE it is more an issue of pay design than pay quantum.
Anna Turley
That was not quite a yes or a no. I will try with Marion. What is your view?
Marion Sears
In some cases, yes, but in general, no.
Anna Turley
Charles?
Charles Cotton
Yes.
Anna Turley
Taking as a starting point that there are issues to be dealt with for some in the pay design, as you qualify it, who should be undertaking and doing that? We have a corporate governance code that does not have any explicit sanctions in it from the FRC; it just says it is on a comply-or-explain basis. Is that sufficient? Can we rely on shareholders to put that pressure on? Should the FRC have a stronger role to play in enforcing a stronger set of guidelines for a revised code? Is the FRC up to the task?
Clare Chapman
There is not a market failure with regard to the ability of investors to apply stewardship to the companies they invest in. That would be the first point. There are instances where better quality of stewardship could be applied, particularly where an investor is not a long‑term shareholder of a company. By and large, I do not think you could say there is a market failure.
Marion Sears
I think you will find a policy vote works quite well, because there is this very clear boundary and it is an AGM-voted-on boundary. I think stewardship works. The shareholders are very much on the case of pay now. We just need to make sure that the conversations we are having take place in good time and between all parts of the institutions. You have fund managers who really look at the investment performance and you have stewardship teams that look at governance. It is important that the executives get the message from both, and the non‑execs get the message from both. That can all be done within the existing framework, but we all need to do it.
Charles Cotton
We need more engagement from investors in what is being rewarded, how and why, rather than focusing on the narrow metrics that there are at the moment. There is a role for the FRC. If its role is going to be expanded, presumably it would need additional resources to do that.
Anna Turley
We mentioned binding votes. In our previous report, we recommended that there should be annual binding votes in the event of a vote against over 25% of the pay report. Do you think that is workable and doable? Do you think there should be strengthening in the annual binding votes?
Charles Cotton
Yes.
Marion Sears
I would say a binding vote focuses the mind more than an advisory vote.
Clare Chapman
I do not think you would want a policy vote more than once every three years because, for a lot of companies, their long-term plans are three to five years. To be doing annual votes on policy would be far too frequent.
Vernon Coaker
Can I ask about pay ratios? It is quite astonishing, the evidence this morning, shining a light on all this. We should remind ourselves the minimum wage is £7.83 an hour. The living wage is £8.75 outside London. You can see why the questions have been asked here about the differences, and why there is frankly such disquiet about it, because people cannot believe this. Was it £42 million or something?
Chair
It was £45 million. What is £3 million between friends?
Vernon Coaker
I beg your pardon. Then there is somebody on £7.83. I have just looked at some of the salaries at Weir Group and at Persimmon. That is the general context of it. Charles, what about pay ratios? The Government are going to introduce a statutory requirement to do that. That is a good thing, is it not?
Charles Cotton
Yes.
Vernon Coaker
Why are they not doing it at the moment? Have you asked your members? Hardly anybody is doing it at the moment, and yet the Investment Association has asked people to.
Charles Cotton
The CIPD as an organisation has been publishing its pay ratios for a number of years, and if you wade through the reports you can calculate them. Just as gender pay gap reporting has been a game changer in encouraging stakeholders to think about how women’s work is valued, this will also lead to a bigger conversation about how employees’ work is valued and how various remuneration practices take place. For instance, one of the things I would imagine upsets many employees is the fact that their pay is going to be rounded up to the nearest pound.
Vernon Coaker
You are in favour of pay ratios. Will you be communicating that to people who are members? Will you be making that widely known to people?
Charles Cotton
Yes. The CIPD, together with the High Pay Centre, has been carrying out this research for the last couple of years. One of our recommendations is that organisations should publish their pay ratios. Next month, we expect the paper to come out requiring organisations to do that. I think it will start a conversation both within the organisation and with its stakeholders about what has been rewarded, why and how things can be improved.
Vernon Coaker
It is quite handy knowing that you are in favour of that. I will condense this down a bit, because we are a bit pushed for time. At Persimmon and Weir Group, what are the pay ratios at your companies at the moment? Do you know?
Clare Chapman
At Weir it is about 20:1. Vernon, again, we are literally waiting for any day now. BEIS has consulted on the right formula for calculating pay ratios, and we are expecting that any day now. The expectation is that it will be reported. Over in the US, where I am on a board, it has been a requirement to publish pay ratios for at least a year now.
Vernon Coaker
You are happy with the requirement to publish pay.
Clare Chapman
The one big danger is that people will start to compare across companies. Depending on how people-intensive and frontline-intensive your business is, it is going to be different by sector. It will be very important that there is accountability on how it has changed year on year within your own company, because that is where there needs to be transparency and accountability as to what is driving the difference.
Vernon Coaker
You think sector by sector is a better way.
Clare Chapman
Sector by sector is a far better way of looking at the data. That is certain, but we as a board will be looking at our own pay ratio and understanding how it changes over time.
Marion Sears
Pay ratios will be a useful tool as the remco comes into having—
Vernon Coaker
First of all, do you agree with the requirement there will be for companies to publish pay ratios? There will not be any choice, but do you think it is a good thing?
Marion Sears
It will be a useful tool to look at, to see what is happening in an organisation.
Vernon Coaker
Is it a good thing?
Marion Sears
Yes, it is always good to look at data and measure. Up until now, the remco’s duties have really been about executive pay, but its duties will widen to the full workforce. Pay ratios will be an obvious way to examine that.
Vernon Coaker
The Government are looking at doing it between CEOs and an average, are they not, rather than what you have just said, which is between different tiers of management?
Marion Sears
Once you get into pay ratios, you can cut it many ways. That will be our job.
Vernon Coaker
Why have businesses not done it now? Why does it require statute to do it?
Clare Chapman
Boards that recognise—
Vernon Coaker
That is all fine, but why does it require the Government to tell them?
Clare Chapman
I would not automatically assume, Vernon, that, just because it is not published, boards do not look at it. We have been looking at issues around fair pay at Kingfisher and Weir for a number of years. It is more a case of that there will be an industry standard now around which reporting will happen. That will lead to a different type of debate.
Vernon Coaker
Marion, why is it not done? Why does the Government need to statutorily require it to be done?
Marion Sears
It is done in many ways in different companies. Individual companies have done things in their own way. As Clare says, this will require everybody to do the same thing. Requiring a measurement shines a spotlight. It will be helpful.
Vernon Coaker
It will be interesting to look at the actual pay ratios, but to have to statutorily require people to do it shows part of the problem, does it not? Charles, does that not show part of the problem? Big companies with this corporate pay are changing their behaviour, and the remco boards are starting to look at doing something differently, partly because of embarrassment, the public disquiet that there is and the damage it does to the reputation of their various businesses. It is only because there is a light being shone on it that this is being done, but it still takes the force of the law to require companies to do something that ordinary people would probably expect them to do. They are incredulous at some of this.
Charles Cotton
The challenge in the past was that organisations would have found it difficult to collect and analyse this data. However, advances in new technology mean it is now a lot simpler. Organisations were reluctant to start publishing their data if they were going to be the only organisation within their sector or nationally, because then the light would be shone on them. Technological advances mean that they should be able to produce this data. You should be able to work out how many people you employ and what they are getting paid.
Chair
Is the truth not that companies publish an awful lot of data, even if it is not comparable across companies, to put themselves in a good light? The problem with the sort of data that Vernon has been asking about is that it does not paint you in a good light, and that is why you have not published it. That is a rhetorical question. Do you have any workers on your remuneration committee, Clare Chapman or Marion Sears?
Clare Chapman
We have a non-executive director who has special responsibility for understanding staff engagement issues.
Chair
Are they a worker at the company?
Clare Chapman
No, she is a non-executive director.
Chair
The answer is no, then, Clare. You do not have a worker on it.
Clare Chapman
We have a non-executive director who is specifically responsible.
Chair
That was not my question, with all respect, Clare Chapman.
Clare Chapman
With respect, Rachel, when the corporate governance options were laid out, one was for a non-executive director—
Chair
I know that, Clare Chapman. I am aware of what the requirements are. However, I was asking you a specific question, to which the answer is no. Marion Sears, do you have a worker on your remuneration committee?
Marion Sears
No.
Charles Cotton
Yes.
Chair
Thank you very much, Charles Cotton. Of your members, Charles, do you know what proportion would have workers on their remuneration committees?
Charles Cotton
It is very small. We have not done any research, but we could not find anything for the FTSE 100 about how many organisations had a dedicated employee rep on their remuneration committee. We could not find anything.
Chair
I just want to come back to a couple of issues; I am aware of the time. One of the things that this Select Committee looked at previously was the long-term incentive plans. There is some evidence that companies are trying to move away from them, but one of the barriers that we hear is that institutional investors are influenced by attitudes in the US to LTIPs. Clare, what is your experience of Weir Group on that?
Clare Chapman
We have a large number of US investors, and they voted in favour of the Weir scheme to move to a deferred share scheme over up to seven years. You are able to bring shareholders with you. You need a compelling case. In the case of Weir, given that we are in oil and gas and mining, it is difficult to anticipate the value of the oil price next week, let alone in three years’ time. The volatility of our sector meant that we very much came into the category that the IA working party showed: that we are in a sector where LTIPs do not work. Therefore, the American investors were persuaded by our argument to put in deferred shares.
Chair
That is very helpful.
Marion Sears
I have seen LTIPs work. In the Persimmon LTIP case, there was not a discretion and it would have changed everything if there had been. Let us not say LTIPs do not work, but they need to be structured correctly. I am enticed by the simplicity of the restricted stock model, but the overriding principle is to have executives owning as many shares as possible.
Chair
To come back to the specific point about the role of US investors, is that a barrier to moving away from LTIPs or is that not a relevant consideration?
Marion Sears
We do not have many US investors. We are a domestic company.
Chair
One other thing I wanted to pick up on is this issue of clawing back bonuses, because it is something that came up during our inquiry on Carillion. Should there be some minimum standards, maybe set and policed by the FRC or someone else, about when you can claw back bonuses? Should it be made easier to do that?
Marion Sears
That is probably happening in itself anyway without the enforced standards, because of what is going on. Remco chairs are asking themselves, “How can we make sure our discretion or claw back is watertight?” I know that remco chairs are asking themselves that.
Chair
You do not think you need someone to set standards of what that might look like.
Marion Sears
It would not make a difference to me. If I was putting a structure in, I would make sure it was good by taking proper advice, but a standard might be helpful.
Chair
You come from Persimmon and you were on the board of Persimmon not when the LTIP was set but certainly while it was in place. The idea that companies are complicit themselves, certainly from the experience of Persimmon, would suggest that you may need some outside organisation to say, “Wait a second; that is not a good standard”.
Marion Sears
The world has changed a huge amount since 2012 when that Persimmon LTIP was designed and implemented.
Chair
Carillon had this bonus clawback thing changed only in 2016, so it has not changed that much.
Marion Sears
I see.
Clare Chapman
There are two things. First, in both Kingfisher and Weir, our clawback requirements are more stringent than what is in the guidelines. However, there is one thing that would be very useful to solve for, and Marion is right that work is going on in this. It is quite difficult to prove in law that you can apply a clawback in an insolvency situation unless you can demonstrate an individual’s contribution. That is the thing we now need to make sure we can find a solution for in law.
Chair
We will move now to the next session, but thank you, all three of you, for coming to give evidence this morning. Examination of Witnesses
Witnesses
Andrew Ninian, Robert Hodgkinson, Sarah Wilson and Euan Stirling.
Chair
Thank you for coming to give evidence this morning. I think you were all sitting in for the first session, so you will have heard the themes we are covering this morning, on this issue of corporate governance and executive pay. The first question in this session is from Drew Hendry.
Drew Hendry
I will start with Sarah. Would you agree that there has been an improvement in remuneration policies and outcomes this year? If so, what figures should we use as evidence that underline that?
Sarah Wilson
You are right to focus on the fact that, depending on the number you look at, you can get a different answer. If you look at the single figure of total remuneration, it looks as though pay has gone up. That is the statutory figure. If you look at other forms of disclosure, it has gone down. This can be very confusing, because the single figure is what everybody has been told to use. It has many systemic problems, and we have encouraged BEIS and the FRC to take a look at this. It would be a bit like driving your car and only looking in the rear-view mirror, when any good driver knows they have to use the wing mirrors, the rear-view mirror and look ahead on the road. While a single figure sounds very seductive because of its simplicity, there should be three single figures that boards present: total remuneration awarded, realised and realisable, so that people can see the long-term picture, the mid-term picture and the picture now. We have certainly seen things improve and, over the last three or four years, pay on a total remuneration awarded basis has been flat for chief executives and finance directors.
Drew Hendry
What response have you had to the suggestion that those three figures should be used?
Sarah Wilson
When the initial design proposals were put forward, there was a degree of sympathy for that proposal. We presented considerable evidence for it. Ultimately, we were concerned that there was too much influence from possibly US accounting standards and practice. We hope BEIS will revisit this, because it is not complicated for this to be presented, but I think it was an overwhelmingly political decision in the end. It has been very useful to have a single figure, because it has made people stop and think about the data and be more probing about it. That has to be a good thing.
Drew Hendry
Euan Stirling, what would have been the principal drivers of pay restraint over the past year? Has the public and political pressure had an impact? What have been the main obstacles?
Euan Stirling
The public and political pressure has had an impact and has certainly emboldened shareholders to take quite a strong line when they are reviewing remuneration plans. Obstacles are wide, varied and differ from company to company. The point was made in the earlier session that company executives can be very successful and proficient negotiators. If you look at the job that the remuneration committees have up against that, that is probably one of the biggest obstacles. It is company executives themselves in many cases.
Drew Hendry
Are you satisfied with the progress on the recommendations of your working group, Andrew, on executive pay?