Investors have welcomed a move by the UK’s Financial Reporting Council to urge companies to engage more closely with their workforce, amid public concerns over remuneration.
In a statement accompanying the release of a new UK Corporate Governance Code on Monday, the FRC’s executive director of Corporate Governance and Reporting, Paul George, said the revised code now looks at workforce remuneration policies and the practices of setting director remuneration.
He explained: “The new Code emphasises that remuneration committees should take into account workforce remuneration policies and practices when setting director remuneration, and, importantly, to step back from formulaic calculations of performance-related pay awards and apply discretion when the resulting outcome is not justified.
“Inevitably Remuneration Committees will need to earn the trust of shareholders with downward discretion before proposing upward discretion.”
It comes as fund firms have been increasingly pressing companies to have a clear link between the remuneration of their leadership teams and corporate financial performance.
In a statement responding to the changes, Hermes Investment Management’s chief executive, Saker Nusseibeh, said his company strongly supported the integration of “the employee voice into board decision-making.”
He explained: “The new remuneration requirement calling for performance-related pay packages being clearly linked to the company’s long-term objectives could be transformative in approaches to executive pay.”
The trade group that represents UK pension schemes, the Pensions and Lifetime Savings Association (PLSA), said the updated Code is right to recognise the correlation between good governance and good company performance.
Caroline Escott, the trade group’s policy lead for Investment and defined benefit, said: “The PLSA has consistently highlighted the importance of corporate culture and employment practices to long-term investors.
“We therefore welcome the new provision to better enable a company to engage with its workforce in the Code. The emphasis now should be on how to ensure companies apply this meaningfully and in a way which means the experience of workers is fully reflected in board decision-making.”