European Audit Committee Leadership Network, August 2013
On 28 June 2013, members of the European Audit Committee Leadership Network (EACLN) met in Paris to discuss executive remuneration, among other topics. For the session on executive remuneration, members were joined by Piia Pilv, a partner at remuneration consultants New Bridge Street/AonHewitt.
This document summarizes the key points that Ms. Pilv and members raised in the discussion, along with background information and perspectives that Ms. Pilv, the members, and other experts shared before the meeting.
Ms. Pilv and the members engaged in a wide-ranging discussion of executive remuneration that touched on issues involving public debate and policy on the topic and companies’ attempts to address these issues. Three key themes emerged:
Pressures on pay may have negative consequences
Remuneration remains a major topic of debate in Europe, and though institutional investors have a range of views, the misgivings of the public and policymakers are driving a variety of regulatory initiatives, including caps on pay and binding say on pay. Ms. Pilv and the EACLN members saw the possibility of unintended and adverse consequences resulting from these initiatives. Many of them are attempts to transfer power from boards to shareholders in a way that is unlikely to add value to the companies concerned, given the inclinations and capabilities of shareholders.
Companies should avoid simplistic remuneration policies
Ms. Pilv and the members noted that linking pay to company performance is a complex challenge that ultimately requires the use of discretion and judgment, even if boards are sometimes reluctant to stray from formulaic approaches. Judgment is especially important where long-term targets are used. Relative total shareholder return (TSR) should be supplemented with other performance metrics, such as profitability and cash flow. Ms. Pilv said that while some aspects of remuneration, such as the proportion paid as fixed salary, still vary among countries, the benchmarks for determining variable pay are being harmonized across Europe.
The audit committee can help oversee remuneration
While remuneration (or compensation) committees typically take the lead on decisions on pay, audit committees can help define and review performance metrics, ensure that the numbers driving payout are subject to rigorous control, assess remuneration risk, review disclosures and oversee remuneration audits. The two committees can coordinate their activities through reporting arrangements and cross-memberships. Several EACLN members noted, however, that the importance of executive remuneration ultimately makes it the responsibility of the full board. As one said, “Decisions don’t go from the remuneration company to the audit committee, but straight to the board as a whole.”