Remuneration committee

Introduction to the remuneration committee

Of all committees of the board, the remuneration committee has three elements that are imperative in its successful functioning:

transparency of outcomes
clarity of deliverables
independence of action from the board or influencers.

In some cases, this committee is combined with the nominations committee, given their shared roles on building effective leadership, whether through appointments to the board or remunerating leaders and executives. Here, we look at the remuneration committee in isolation.

Duties of this committee include the actual setting of remuneration for senior management by the remuneration committee, in addition to executive and (where relevant) non-executive directors. The remuneration committee should also review workforce remuneration and related policies and the alignment of incentives and rewards with culture, which should be taken into account when setting the policy for executive directors.

Many sports organisations do not remunerate their non-executive directors or board members. However, given the high profile of remuneration for directors where it does take place, the output and effectiveness of this committee are highly important for the public profile of the organisation and the knock-on effect this can have across the external environment. This is equally applicable if your organisation is a charity or with a visible presence and significant member associations. Public scrutiny of senior remuneration is high across all sectors, particularly where public money or charitable donations are involved, and this focus on pay can place the work of the remuneration committee under the spotlight.

Duties, responsibilities and tasks

There are three key roles that the remuneration committee fulfils:

to set the policy for board and senior management remuneration,
to set or approve individual remuneration awards and
to oversee company-wide remuneration policies.

Let’s have a look at each of these.

The Code for Sports Governance requires that:
‘remuneration of directors and employees, if any, shall be determined in accordance with a formal, approved procedure’ (Req. 2.13)

The main responsibility of the remuneration committee is to set the policy for board and senior management remuneration, aligning it to the strategy of the organisation as set by the board as well as to organisational values. A robust policy can help to ensure that remuneration is aligned to the purpose of the organisation so driving engagement and helping to deliver long-term sustainable success for the organisation, keeping the two closely intertwined.

To be able to deliver in its role, the remuneration committee should have a clear understanding of the strategy of the organisation and its drivers as well as of the wider sports sector. By understanding the strategy, suggested metrics and deliverables can be proposed, discussed, and agreed upon. As strategy is primarily a long-term view of the future of the business, it can underpin long-term incentives within a remuneration policy.

Generally, remuneration committees are not creating a remuneration policy from scratch and are instead reviewing and revising existing policies for current suitability and application. A complete review of the policy, as if it was being implemented for the first time, should be undertaken at defined intervals and on significant change to the organisation or the composition of the executive team. The committee will also review the policy on a regular basis, ensuring it continues to adapt to changes in strategy, direction, and external conditions in the sector.

When setting the policy, the committee should reflect on the balance between setting the policy for individuals versus the roles they perform. The key is to ensure that the policy is aligned to strategy and organisational objectives, is effective in its aims, and management, at all levels, buys into it rather than seeking ways to work around it or manipulate it. It should be remembered that the purpose of a remuneration policy is to encourage and motivate appointees to deliver the best they can in their role and to continue to be the best candidate for the role.

When setting performance measures and targets, the committee should ensure that they are robust, meaningful, and aligned to the strategy. The policy should be transparent to all stakeholders. When documenting the policy, the committee should ensure that it is clear, concise and understandable. Complexity in policy will have a knock-on effect in terms of complexity in its application, with a potential challenge in its application that would be difficult to explain.

This function of the remuneration committee helps in creating independence of application and removes the ability of senior management to influence metrics supporting remuneration setting.

Whether its responsibility is to set or approve remuneration, the committee is the independent arbitrator of the application of the policy. During the review, consideration should be given to the application of the set policy in respect of each individual award, as well as the impact of stakeholders and other third parties. While the committee could simply apply the policy and approve the award, circumstances may have changed between setting the policy and its application that should be taken into consideration.

A by-product of the review of executive remuneration may also include an annual appraisal of the chief executive. Consistency in approach should be aimed for, and the appraisal of the CEO may also form the framework for their appraisal of other members of the executive or management.

Increasingly, the remuneration committee also oversees the approach to remuneration for the whole organisation and its effectiveness in delivering the required results. Oversight here is not just against the organisation’s strategy but, more particularly, in respect of diversity, inclusion, and gender pay. Metrics on these latter points may be required to be included in annual reports and made publicly available, adding to the transparency required from the organisation and the remuneration committee on their behalf.

The remuneration policy of the whole organisation will be set, applied and reviewed by the HR department with the support of the board. The role of the remuneration committee is to review its application and the effectiveness of its desired results. For example, if a company-wide policy has an aim to retain staff, does the policy deliver this? Other aims may include support of professional development, inclusion, and promotion of minorities, staff engagement in its widest sense, or application of defined role deliverables.

In having oversight of the wider policy, remuneration committee members will need to understand a range of drivers including financial, performance and sporting, and will have to engage with people policies and development attributes. In the majority of companies, staff costs are the largest balance sheet cost as well as the greatest opportunity for success, so ensuring the people policy is effective and fully understood, and supported by the executive is highly important.

Keys to a robust remuneration policy

When determining a remuneration policy, the remuneration committee should address the following:

Clarity – remuneration arrangements should be transparent and promote effective engagement with stakeholders and the workforce
Simplicity – remuneration structures should avoid complexity, and their rationale and operation should be easy to understand
Risk – remuneration arrangements should consider reputational and other risks from excessive rewards and ensure that behavioural risks that can arise from target-based incentive plans are identified and mitigated
Predictability – the range of possible values of rewards and any other limits or discretions should be identified and explained at the time of approving the policy
Proportionality – the link between individual awards, the delivery of strategy, and the long-term performance of the organisation should be clear. Outcomes should not reward poor performance.
Alignment to culture – incentive schemes should drive behaviours consistent with the organisation’s agreed purpose, values and strategy

Terms of reference

Standard terms of reference should be used for the remuneration committee with some specific points to note.

The frequency with which the remuneration committee needs to meet will vary depending on the nature, scale and complexity of the business of the organisation, and this may change from time to time. It is clear, however, that its greatest impact is on an organisation when remuneration is discussed, reviewed, approved and applied. In addition, it must meet close to the year-end to review the directors’ remuneration report, where one must be submitted to shareholders or members for approval at the AGM.

It is recommended that the remuneration committee should meet at least twice a year in order to effectively discharge its responsibilities, although additional meetings may be considered to review the effectiveness of the organisation-wide employee strategy outside of the discussions on executive remuneration.

The chair of the remuneration committee should attend the AGM to be available to answer any questions about the workings of the committee.

The committee should also have the authority to appoint remuneration advisers or purchase information to support their discussions, without recourse to or permission from the board – as long as they keep within any budgetary constraints or guidelines applicable within the company and as set by the board.

Composition

Remuneration committees should be comprised of independent non-executive directors, with a minimum membership of three, or in the case of smaller organisations, two. In addition, the chair of the board can only be a member if they are independent on appointment, and they cannot chair the remuneration committee. Before appointment as chair of the remuneration committee, it is recommended that the appointee should have served on a remuneration committee for at least 12 months.

The input of information from other committees within the organisation may serve to form the core committee membership, noting the requirement for remuneration committee members to be non-executive and independent. Committee members from other committees may be invaluable members of the remuneration committee. Despite their independence from the operations of the organisation, their committee roles will have provided them with direct experience and understanding of the organisation, its executive and the strategy.

Member characteristics

Independence of judgement and discretion when authorising or reviewing remuneration application is a core characteristic of all members of the remuneration committee. They must be able to balance the incentives for individuals versus the collective and the success and focus of the whole organisation. This includes independence from the influence of board members, shareholders or members and/or other stakeholders. Taking evidence, advice, or views from all relevant parties is highly important. The ability to assess and apply this feedback and use it as part of confidential and independent decision-making is key.

Although an obvious conflict of interest, it should be stated clearly that no director may be involved in any decisions on their own remuneration.

Key attributes of remuneration committee membership are:

Knowledge – of HR processes and value drivers of people engagement through remuneration, whether at the executive level or the wider workforce
Numeracy – technical financial knowledge is potentially greater than that for an audit committee member, given it is the application of metrics that is key as much as trend identification and historical reporting
Diversity – of contributors to drive constructive discussion and debate to deliver meaningful and beneficial outcomes
Balance – opinions need to be fair, unbiased and balanced, given this is the outcome required for remuneration policies and their application
Communication – outcomes need to be transparent, while discussion needs to take into account the views and input of multiple stakeholders. Receipt of information, its dissemination into discussions and distribution via policies and reporting underpin the workings of this committee more than any other.
Emotional intelligence – members of the remuneration committee require a high level of emotional intelligence to be able to balance the people element of their role alongside good governance and the application of decisions. It is this attribute that remuneration committee members identify as the distinguishing factor of their role, although it can be difficult to identify during interview stages for new committee members.

Interaction beyond the committee

Of all the committees of the board, the remuneration committee has a connection with the widest internal audience, reflecting its oversight role on all employee remuneration and incentive policies. In light of this, the interaction with the HR team is critical, with members

needing to have an understanding of the drivers and motivations of employees as well as the organisation itself. Getting positive benefits from any incentive plan or spend by HR can underpin a successful business. The remuneration committee is there to challenge the incentive plans of the whole business aligned to the success of the company.

Additionally, the remuneration committee will interact with the finance team, ensuring that remuneration policies support the success of the business and do not have a negative impact financially. Stress-testing scenarios of policy application on the financial balance sheet will enable remuneration committee members to understand the potential consequences that the policy may have. This stress testing should be undertaken outside of the policy application period to ensure that other calendar deliverables do not result in a rushed process that may deliver incomplete results.

Interaction with the wider employee community is most prevalent via the publication of the expected deliverables under the remuneration policy. Metrics used to underpin the policy should be published to ensure visibility and clarity, while these same metrics should be applied from top to bottom so that policies are fair throughout. A general rule is that if deliverables are difficult to explain to all staff as stakeholders, then the policy does not work. This is particularly relevant when deliverables are aligned to behaviours rather than metrics. For example, if there is a company value in treating colleagues with respect, how is this translated into actions aligned to remuneration?

Finally, the remuneration committee will interact with other committees of the board. In particular, they have an affinity with the nominations committee, and these two committees are often combined. Input from other committees either directly or through their roles and responsibilities can also contribute to the remuneration policies being set. As an example, risk criteria, accountability, acceptability, and mitigation may underpin specific deliverables. Thus, understanding the workings of the risk committee is invaluable in aligning metrics, behaviours and expected outcomes. The terms of reference of the risk committee may specifically require this input, particularly in providing qualitative and quantitative advice on risk weightings to be applied to performance objectives incorporated in remuneration. Similarly, the output of the finance and audit committee will contribute to the remuneration policy related to the CEO and CFO, among others.

Externally, remuneration committee members frequently interact with shareholders or members to gain their input into the remuneration policy. Shareholders or members may vote on remuneration policies and individual remuneration packages at the AGM, hence being able to understand concerns and, where relevant, adjust policies to reflect these concerns is beneficial. The remuneration committee chair should attend the AGM to be available to answer any questions on the operations of the committee.

In support of this, committee members should ensure that documented policies and their applications are transparent and justified so that concerns can be addressed and responded to.

Remuneration committee members may meet shareholders or members formally or informally. While their views and opinions do not have to be followed, understanding concerns and learning from these discussions would be prudent. Equally beneficial would be to address these concerns in any reporting if they have not been addressed in the remuneration policy.

As a visible committee of an organisation, activities of the remuneration committee may also be picked up by the press. Members and those that support this committee should be mindful of the need for transparency in all reporting as well as discretion and confidentiality of discussions.

Reporting

In the annual report

Best practice reports show how remuneration is considered alongside the long-term interests of the organisation and how effective the remuneration policy is in creating positive change in organisational culture. Hence the operations of the committee should be reported in the annual report, mirroring the requirement for transparency and clarity in the remuneration policy itself.

In general, the report should include details of:

how the committee has delivered on its objectives
the meeting frequency and attendance by named members
membership and any changes made during the year

For large and medium-sized companies, the Companies (Miscellaneous Reporting) Regulations 2018 contain a requirement to include an annual statement from the chair of the remuneration committee in the annual report, which should include a summary of any discretion exercised by the remuneration committee in relation to the award of directors’ remuneration.

In addition, the report should include data provided by the company, specifically HR, on diversity, pay ratios and other people-specific metrics.

Under Financial Reporting Council guidance, there should also be a description of the work undertaken by the remuneration committee in the annual report, including:

an explanation of the strategic rationale for executive directors’ remuneration policies, structures and any performance metrics
reasons why the remuneration is appropriate using internal and external measures, including pay ratios and pay gaps
a description, with examples, of how the remuneration committee has addressed the factors of clarity, simplicity, risk, predictability, proportionality and alignment to culture
whether the remuneration policy operated as intended in terms of organisational performance and, if not, what changes are necessary
what engagement has taken place with stakeholders and the impact this has had on remuneration policy and outcomes
what engagement with the workforce has taken place to explain how executive remuneration aligns with wider pay policy
to what extent discretion has been applied to remuneration outcomes and the reasons why

Reporting for small companies may not be so onerous. Nevertheless, these might all be seen as important factors to take into account when considering a remuneration policy.

To the annual general meeting

The remuneration committee should be mindful of the high level of focus on their output which might be raised by shareholders or members, particularly at the AGM. While reporting at the AGM is led by the CEO and chair of the board, the chair of the remuneration committee should be in attendance to answer any questions on the operation of the committee and the application of its policy.

Supporting the committee

It is good practice for the company secretary or governance lead to act as secretary to the committee and for the committee to have access to the services of the secretariat on all remuneration committee matters. The remuneration committee should receive information and papers in a timely manner to enable full and proper consideration to be given to the issues.

When supporting a remuneration committee, HR, finance and other support teams should be mindful of the confidentiality of the discussions in these forums. Transparency of outcomes is important for stakeholders, including employees. Prior distribution of draft policies can have a significantly detrimental impact on the business.

It should also be noted that this committee does not have an executive board member represented, although the outcome of the discussions will invariably be discussed with the CEO, board chair, or other senior executives to ensure alignment of thought. This lack of an executive director may put other internal information providers in a position of conflict, and they may come under pressure to provide information or share knowledge of discussions. Most professional employees are mindful of these conflicts within their roles and can accommodate them.

When submitting financial or other metrics to the remuneration committee, staff members should ensure that the data is consistent with that submitted to other forums. Metrics, if they are different in content or show anomalies, should be clearly marked with any inconsistencies flagged and explained. For example, if employee numbers are a required metric, it should be clear if the employee numbers include all staff, exclude contracted staff, are pro-rata for part-time workers, reflect any zero-hour contracts appropriately, identify seasonal changes, or whether any other adjustments are made to staff numbers.

Financial metrics often underpin remuneration deliverables. All financial metrics can be adapted to purpose, with changes made depending on audience or need. When being used to support remuneration payments, those submitting the metrics should be as mindful of transparency and clarity as committee members themselves. If, once remuneration packages are disclosed, the underlying metrics are questioned, it will call into question the wider reporting of the business and its veracity.

Conclusion

Transparency, clarity, and independence are the three main features of the remuneration committee. Members and those supporting this committee should be mindful of these three elements in all interaction, written reporting, application of decisions and outcomes.
In those organisations of sufficient size to justify the implementation of a remuneration committee, this is a visible committee in respect of its actions. A range of stakeholders are personally and professionally interested in outcomes and how they can affect the success of the organisation.