The Chartered Institute of Personnel and Development (CIPD) and the High Pay Centre (HPC) published a report over the summer setting out recommendations for the role of the Remuneration Committee (RemCo) in large businesses (the Report).
The Report follows a previous report published in 2019 that set out the principles RemCos should follow (the Principles). The Report provides practical steps that can be taken to implement the Principles, specifically in the area of people and pay governance, while also elaborating on what the Principles mean in practice in a post-Covid world.
The CIPD and HPC published their Principles on the back of changes made to the UK Corporate Governance Code in 2018. These were implemented to broaden the remit of boards and RemCos to ensure that they focussed on worker engagement and management issues, such as culture, workforce pay and employee dialogue. However, the CIPD and HPC believed that new guidance was needed after the events of the previous two years. They argue that the Covid-19 pandemic has highlighted issues with executive pay and employment practices together with those of social and economic inequality.
As a result, the Report aims to give guidance to businesses navigating the tricky post-pandemic world. It contains a number of key recommendations based on the Principles and on further research carried out over the past year, which consisted of observing practical measures a number of companies are already undertaking and conducting interviews with leading figures in HR and reward.
Ultimately, the key recommendations are based on the belief that boards and RemCos must strengthen their oversight, engagement and involvement in people management, building strong relationships between HR leaders, boards and employees, to create a robust and healthy dialogue with the workforce and consider worker issues when making every major decision, in particular in relation to executive pay.
To achieve these objectives, the Report sets out three key recommendations:
People and culture matters should be board level issues. The remit of the RemCo should be expanded to include the review of workforce pay, people matters and culture, not just executive pay. Appointing at least one board member with HR experience and appointing a RemCo chair with expertise and interest in workforce/long-term sustainability are practical recommendations given by the Report to implement this. (The Corporate Governance Code does, of course, already require the Remco of companies subject to it to review workforce remuneration).
Non-financial as well as financial metrics should be used to measure company performance. Employees often see a businesses’ aims and performance in ways that go beyond just financial measurements or shareholder returns, and the board and RemCo should reflect this. The Report stresses that such non-financial metrics (such as social, environmental and workforce-related metrics) must be robust to be effective and recognises that achieving this would be a key challenge. There has been a greater move towards metrics that reflect a company’s wider ESG strategy, but investors more generally want to ensure that these remain robust and challenging.
Companies should put in place meaningful workforce engagement measures and practices, and employees should be substantively involved in the pay-setting process. Establishing workforce committees or forums appointing a worker director and having strong communication links with the workforce are practical recommendations given by the Report to implement this. Again, for companies subject to the Corporate Governance Code, this is not a new requirement.
The Report recognises that many businesses are already strengthening their workforce management and relationships. Following Covid-19, these issues will become only more acute as ways of working during the pandemic become the norm, such as “hybrid working”. Being on top of employee relations at a board and RemCo level will be an important part of general company management and success in the future, and the Report’s recommendations are a useful guide to achieving this.