Research Report: Remuneration Committee Effectiveness, To Govern is To Choose

It is some thirty years since the concept of a Remuneration Committee (‘RemCo’) was introduced to UK Corporate Governance and the ‘effectiveness’ of the Committee has been challenged for almost as long. The idea was first proposed by the Cadbury Report in 1992 in response to an increasing lack of investor confidence in the management of listed companies. The recommendation was then taken up by the Greenbury Report on executive remuneration in 1995, which was commissioned in response to public concerns over the increased levels of reward paid to top executives in the recently privatised public utilities.

Right from the beginning there were different ideas about what a RemCo was supposed to achieve. Was it just there to protect shareholders by limiting the power of executives to set their own rewards? Was their brief to align executive reward more closely with performance, or to enable the company to attract and retain the best talent, or simply to rein in ‘fat cat pay’ and prevent rising inequality?

In the intervening three decades, these tensions have deepened, and new ones have been added. Weak economic growth and pay stagnation have led to a greater focus on inequality. Climate change and shifting social attitudes have driven the adoption of ‘non-financial’ performance measures. The acronym ESG (Environmental, Social and Governance) has become a contested feature of corporate target-setting.

The purpose of this report is therefore to map out this changing context, define the implications and challenges for the RemCo, suggest some ways in which the Committee might respond, and highlight the questions they may need to ask.