To all those reading this I am David Gibbs; I am a Lecturer in Law at the University of East Anglia.

I created this blog as a general out-let of ideas for my research, as well as keeping those interested up-to-date on my research and general interests.

I completed my PhD thesis at the University of East Anglia in 2014. The thesis was recommended for the award of PhD with no corrections. My external examiner was Prof. Simon Deakin (Cambridge) and internal examiner was Prof. Morten Hviid.
My PhD research centred on directors' duties and company law. The thesis was titled 'Non-Executive Self-Interest: Fiduciary Duties and Corporate Governance'. It was a doctrinal and empirical study on whether self-interest was suitably controlled amongst non-executive directors.

My supervisors were Prof. Mathias Siems, Prof. Duncan Sheehan, Dr. Sara Connolly and Dr. Rob Heywood

All opinions of any existing or future blogpost are my own. They do not necessarily represent the views of any of my associated institutions.
ORCID 0000-0002-6596-8536

Friday, 11 May 2012

If you haven't got anything nice to say... don't say anything: The Company Remuneration Bill

Ok so the title of this post is a bit of a misnomer. I do have one good thing to say. Good thing to say about what? Well I am referring to the Company Remuneration Bill that received its first reading in the House of Lords today. The triumphant Bill consists all of four sections. This Bill is, however, unlikely to become law, see here, but below I shall highlight some problems that may be informative for any regulation the government does eventually introduce.

So let's deal with each section in turn (excluding section 4 which is merely stating its application):

Section 1(1): Decisions of remuneration committees as to the remuneration of the directors and five highest paid employees, before implementation, must be ratified by an ordinary resolution.

I have repeatedly pointed out apathy amongst shareholders. Ok yes there has been a bit of a rebellion as of late. But if we are truly honest most of that hype has come from the media. How long will this "shareholder activism" actually last? Not long.

I have also banged on about better non-executives on remuneration committees yet there is no mention of non-executives anywhere in the Bill. Surely the pay packages that were awarded to the directors at Aviva show a complete disregard for common sense amongst non-executives. If non-executives did their job properly there would have been no need for this tighter regulation.

With that in mind there does need to be some mechanism to prevent excess beyond non-executives. As the crisis highlighted, remuneration continually rose as it was a way of attracting the best talent with no consideration of the actual amount. Thus the formation of an independent regulator whom shareholders could complain to would be more desirable surely than trying to coordinate large groups of shareholders in public companies?

Section 1(2): Such decisions MUST be voted on in a secret ballot by all the company's employees, although this is not legally binding

Yes this is a section. You have a remuneration committee, shareholders, and now employees second guessing what you are going to get paid. So much uncertainty and so many voices. Why do the creditors not get a vote if you give one to employees? The non-executives are there to be independent and award remuneration. If they do not do their job correctly they should be fired. The term overkill is certainly coming to mind with executive remuneration.

The wording is very interesting. The words "must" and "all" seem a bit optimistic. Are all the employees really going to vote? Did all public sector workers vote whether to strike?

Section 2(1): Where a ballot is held under section 1(2) this must be reported in the following year's annual report

Well this section slightly ignores the wording of the one prior. If the decisions must be voted on by all the company's employees then ipso facto it will need to be published under section 2(1). Surely all that needs to be said under section 2(1) is the results of the ballot must be published if one is always required to be made.

Section 2(2): The remuneration report must prominently feature the remuneration ratio between the highest paid director or employee and average remuneration of the lowest remunerated 10% of employees.

So this is something I actually agree on. In fact I do not think it goes far enough. I feel that long term incentive plans should probably have employee remuneration criteria attached to it. As such executive remuneration should not go up when employees are made redundant. At least some publication of the ratio will put things in to perspective for directors by physically having to consider the differences.

In fact this may be great for executives if they decide to fire everyone in the lowest 10% since the ratio will decrease... certainly food for thought as to the wording and ratio to be disclosed...

Section 3: Interpretation

OK so I wish to focus on the interpretation of one particular word. That is "remuneration". This section defines remuneration as "all rewards and benefits, including, inparticular, share options, bonuses, beneficial rights and salaries.

Well for anyone who knows even the slightest bit about remuneration this section is as confusing as it can possibly get. In the UK remuneration already has two meanings where there are already discrepancies. So this is in fact a third definition that clearly has no consideration as to the differences between the different types of compensation paid to directors. I have discussed these different definitions and award schemes elsewhere, see here.

The definition says all rewards and benefits. Well surely that includes long term incentive plans? But how do you accurately quantify long term incentive plans? A director is not given the shares in long term incentive plans upon award. He has to satisfy criteria over a three year period. If that criteria is not satisfied then the shares do not vest and the director gets nothing. So do we assess the remuneration for Long Term Plans at all when working out the ratio between highest and lowest paid in accordance with section 2(2)? Do you calculate long term plans on the value at the time of the award by multiplying share price by shares awarded; or simply go on the value of the shares that actually vest?

Long Term Plans are also not the only problem. Are pensions to be included? Pensions again are not monies paid by the company. They are merely a debt on the company's books.

Share options also suffer from the same problem as Long Term Incentive Plans. A director only gets rewarded if he exercises those options. So at what point do you assess their value?

Finally as I mentioned, how does this definition of remuneration interplay with the other two found in the Listing Rules and the 2008 Regulations? Surely three definitions of remuneration is more complicated than one. If the idea was to simplify remuneration, I would not call this a good start. The problem with trying to simplify is that it will probably make it more confusing if you attempt to generalise remuneration. Although the rules may seem complex to an outsider, to someone with knowledge of the area the purposes behind the rigid definitions and different mechanisms become clear and quite simple to understand.

My final thought is this goes to show something so true in company law. If you do not regulate yourselves properly, the government will impose something worse.

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