Long-term incentives out, employee representatives in? The UK Parliament’s Business, Energy and Industrial Strategy Committee has included some notable recommendations in its report on an inquiry into corporate governance focused on executive pay, directors duties, and the composition of boards.

Having heard evidence from the likes of GlaxoSmithKline chair Sir Philip Hampton that long-term incentive plans (“LTIPs”) “are designed to pay, or at least end up paying out, even if performance is quite indifferent”, the committee has concluded that “pay levels have now been ratcheted up to levels so high that it is impossible to observe a credible link between pay and performance.”

In seeking to address such concerns, the Committee has proposed the following:

  • Abolition of long-term incentive plans and their replacement with deferred share awards with a minimum five-year vesting horizon
  • Alignment of bonuses with wider corporate responsibility
  • Required resignation of remuneration committee chairs if pay proposals receive less than 75% shareholder support
  • Mandatory annual publication of pay ratios between a company’s CEO and all UK employees
  • Employee representation on remuneration committees

The Committee joins the Investment Association in paving the way for the replacement of traditional LTIPs with simplified deferred share awards. Historically, shareholders have opposed such plans when proposed (most notably at Weir Group plc’s 2016 AGM) on the basis that they are not subject to performance conditions; while they appear to have gained traction over the past year, it will be interesting to see how shareholders respond in practice.

Remuneration committees would be forgiven for feeling a bit hard done by. Besides the recommendation that the committee chairman resign if a pay proposal receives less than 75% support, there’s the timing of the report: most of the FTSE 350 has spent the past months reviewing their remuneration policies ahead of triennial binding votes this spring. Now those policies may need to be revised yet again in light of the Committee’s recommendations. Moreover, the report’s emphasis on reducing LTI quantum is likely to strengthen the resolve of shareholders who intend to oppose increases in LTIP opportunities this AGM season.

As to pay ratios, our conversations with companies have revealed concerns that such data may be misleading because an asset manager, for example, might appear to be a “fairer” employer than, say, a retailer. The BEIS Committee counters that such information would be useful in illustrating the change in the ratios over time at individual companies.

It appears likely that many of the Committee’s proposals will be incorporated into future iterations of the UK Corporate Governance Code with relatively little opposition from business, with one notable exception: Reaction to the Government’s corporate governance reform green paper published last November revealed a determined resistance to the notion of directly involving workers in board affairs. The recommendation is relatively soft here, leaving it to companies “to determine the appointment process”, and acknowledging that “this option may not work for all companies, particularly multinationals with very diverse workforces.” Nonetheless, any non-director involvement in the business of the board would mark a sea change for UK governance.

The Committee’s report is available here (PDF).