Pensions & Investment Research Consultants (PIRC), an independent corporate governance and shareholder advisory consultancy, has launched a consultation proposing a new pay policy.

In a recent blog, Tom Powdrill, PIRC’s head of stewardship, wrote that pay continues to be a major topic of shareholder engagement, taking up large amounts of company and investor time for little benefit.

The PIRC Consultation: Pay for a New World, released last week, stated that running public companies is a challenge, but the current health crisis has shown that other sectors have challenges as well without excessive pay.

“Companies repeatedly find themselves in hot water because schemes designed to be ‘long term’ end up paying out at an inappropriate time,” Powdrill said, adding that “the COVID-19 crisis will only set more challenges” for the current executive pay models out there.

“With pressure on many small businesses of cash flow and losses due to no revenues for several months, it has been apparent that there have been distinct advantages to large listed companies,” the report said.

PIRC also stated that overall pay takes up too much company and investor time. This can be seen by the number of pages devoted to pay in annual reports, and the focus on remuneration issues in reporting of stewardship activity.

“We are sure that companies will have better use of their time by using a simpler approach to pay; such as dealing with board diversity and skills, dealing with the challenges of the environment and climate change and planning for future resilience in the wake of recovery from this health crisis,” it noted.

PIRC said the pandemic has already introduced some change: the ability of financial institutions, a number of which have asset management arms, to self-regulate on pay was betrayed by the Bank of England needing to send its 31 March 2020 letter on bonuses and dividends to banks and insurance companies.

The proposal

PIRC’s consultation on a new pay policy proposes the following five key points:

1. A going rate true market salary, not mark to model;

2. Director service contracts approved by vote;

3. A single profit pool to be distributed company wide, to be voted on as to the amount of the pool and the distribution method;

4. Exceptional bonuses only, paid as a result of an event that has occurred worthy of a bonus, to also be put to a vote;

5. No long-term incentive plans (LTIPs).

The report specifically highlights the proposal’s fifth key point as crucial because it believes that bonuses based on existing performance criteria and LTIPs for 2020 would essentially be a case of ‘force majeure’.

LTIPs “can reward share price volatility and pay out where there has been failure; there are further issues where there are buybacks or capital raising”, the report added.

“Some companies have cut bonuses because of the crisis. Some bonuses are unable to be paid where there is state support.”

But Powdrill believes this is simply not enough. “And in a year where thousands of working people have continued to do their jobs – without any expectation of any bonus or share award – in the face of a major public health risk, we owe it to them to do something better.”

PIRC has already started consulting clients and companies over its ideas for a fundamental overhaul of directors’ pay, putting emphasis on a greatly simplified model.

“In PIRC’s view this should be based primarily on salary and the expectation executives should perform the duties expected of them under company law. A fair day’s pay for a fair day’s work like any other employee would expect. We propose a significant shift away from current practice and major reduction in variable pay,” Powdrill said.

PIRC’s consultation paper can be found here.

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