RemCo Chairs in the Spotlight

RemCo Chairs in the Spotlight

2 Executive Summary As investor pressure on boards to reduce excessive pay and introduce greater transparency has increased, so too has the level of media scrutiny, with compensation packages frequently debated in the context of public fairness. More still, tackling excessive executive compensation has become an enhanced area of focus for the current UK Government, adding another layer of complexity to defining appropriate levels of reward. With a record number of protest votes cast, the 2016 AGM season highlighted the challenges of balancing the interests of executives with those of shareholders. The 2017 season is expected to be no different. In this environment, many observers are beginning to set their sights on the remuneration committee chairs. Who would be a remuneration chair? Not only are these individuals tasked with determining the structure and quantum of complex executive remuneration packages, they are also responsible for ensuring pay is both performance related and acceptable in the eyes of the public. To better understand the individuals who are taking these key decisions, Russell Reynolds Associates examined the sectoral, functional and demographic backgrounds of remuneration committee chairs of FTSE 100 companies. Our research helps to shed light on the qualities and experiences that chairs of these committees share, but also points to potential changes in the role as it continues to evolve.

3 Remuneration Chair Diversity and Experience WHAT IS THE GENDER BREAKDOWN OF FTSE 100 REMUNERATION CHAIRS?* Proportionally, women are represented more strongly in the remuneration chair role than in any other committee chair role. 39 WOMEN 56 MEN 7 20 female nomination committee chairs female audit committee chairs 54% There are more women being recruited into the remuneration chair role than ever before. 54% of those recruited in the last two years were women WHAT ARE THE EXECUTIVE BACKGROUNDS OF FTSE 100 REMUNERATION CHAIRS? Almost one-third of FTSE 100 remuneration chairs derive from financial services, emphasising the demand for strong quantitative abilities in the role. Despite the lack of professional services firms listed in the FTSE 100, 14% of remuneration chairs have backgrounds in this sector. Financial Services 31% Professional Services 14% Pharmaceuticals/Healthcare 2% Consumer 18% Cross-Sector 8% Academia 2% Industrial and Natural Resources 15% TMT 3% Real Estate 1% *Three remuneration chairs chair two FTSE 100 companies.

HOW MANY REMUNERATION CHAIRS WERE IN-SECTOR RECRUITS? There is significant variation by industry when it comes to the match between remuneration chairs backgrounds and the sectors to which they ve been recruited. Sector-specific experience appears not to be an across-theboard recruiting priority, even in the most regulated industries. This is surprising considering the nuances of each sector s remuneration structures. 4 Of the 24 INR Of the 10 TMT Financial services 25% 29% Consumer 20% 30% Consumer 18% TMT 25% Of the 20 Consumer Of the 7 Pharmaceuticals/Healthcare Professional services Financial services 15% 25% 40% INR Professional services 29% 29% 42% Of the 19 Financial Services Of the 5 Real Estate 54% 20% INR TMT 16% 11% Financial services Consumer 20% 40% HOW MANY REMUNERATION CHAIRS WERE RECRUITED STRAIGHT INTO THE ROLE? 44% were recruited straight into the remuneration chair role 20% were on the board for less than a year before becoming remuneration chair The number is high, particularly in the context of the recommended changes to the UK Corporate Governance Code by the Executive Remuneration Working Group*, the independent panel established in 2015 to address concerns over remuneration policy and executive pay. The Group s 2016 report recommends that: Non-Executive Directors should serve on the remuneration committee for at least a year before taking over the chairmanship of the committee. The Financial Reporting Council should consider reflecting this best practice in the UK Corporate Governance Code. x 64% of remuneration chairs in the FTSE 100 do not comply with this recommendation *The Executive Remuneration Working Group s 2016 report draws on 32 roundtable discussions involving over 360 individuals.

5 Tenure and Composition HOW LONG HAVE REMUNERATION CHAIRS BEEN ON THE BOARD? The UK Corporate Governance Code states that best practice is for non-executive directors to serve no more than 9 years on the board. 84 have been in role <6 years 13 have been in role > 6 years 3 have been in role > 9 years Independent?! Any term beyond six years should be subject to particularly rigorous review Board members are no longer considered independent if they have served on the board for more than nine years. DOES THE BOARD CHAIRMAN SIT ON THE REMUNERATION COMMITTEE? 36% The chairman of the board sits on 36% of FTSE Remuneration Committees The Executive Remuneration Working Group recommends that: Boards should ensure the company chairman and whole board are appropriately engaged in the remuneration setting process. This will ensure that the decisions of the remuneration committee are agreed by the board as a whole Should 100% of chairs sit on the remuneration committee? In the spirit of transparency and in an effort to ensure whole-board buy-in it might be advantageous for the chairman of the board of directors to sit on the remuneration committee.

6 Predicted Changes to the Remuneration Chair Role Shareholder management skills Shareholder management skills will be an increasingly important quality in remuneration chairs, as they are required to explain or defend pay packages to shareholders more frequently. Remuneration chair independence As the number of shareholder votes against remuneration chairs increase, greater attention will be placed on the length of tenure served by remuneration chairs and their perceived independence. Mediator Remuneration chairs will increasingly be required to play a mediating role between the executive committee and the shareholders. Balancing shareholders demands with the possibility that CEOs might jump ship if their remuneration packages are not satisfactory, demands a particular skillset. Attractiveness of the role As the remuneration chair is increasingly visible in the public domain, this will impact the attractiveness of the role, consequently making it more difficult to find top remuneration chair talent. Time commitments As remuneration policies are placed under increasing scrutiny by shareholders, the time commitment of the role will grow, as well as the role s overall perceived eminence on the Board. This change calls into question whether the future remuneration chair will be able to hold other chair or SID responsibilities concurrently. Long-term remuneration chair succession planning As the demands placed on the remuneration chair increase, there may be a reduction in the number recruited directly into the role, particularly in light of the Working Group s recommendations. Boards may be increasingly required to develop long-term succession plans to ensure there are internal step-up candidates to the role.

7 Russell Reynolds Associates is a global leader in assessment, executive search and succession planning for boards of directors, chief executive officers and key roles within the C-suite. With more than 400 consultants in 47 offices around the world, we work closely with public, private and nonprofit organizations across all industries and regions. We help our clients build teams of transformational leaders who can meet today s challenges and anticipate the digital, economic, environmental and political trends that are reshaping the global business environment. Find out more at www.russellreynolds.com. Follow us on Twitter: @RRAonLeadership London office Almack House 28 King Street London SW1Y 6QW United Kingdom Tel: +44-20-7839-7788 GLOBAL OFFICES Americas EMEA Asia/Pacific Atlanta Boston Buenos Aires Calgary Chicago Dallas Houston Los Angeles Mexico City Miami Minneapolis/ St. Paul Montréal New York Palo Alto San Francisco São Paulo Stamford Toronto Washington, D.C. Amsterdam Barcelona Brussels Copenhagen Dubai Frankfurt Hamburg Helsinki Istanbul London Madrid Milan Munich Oslo Paris Stockholm Warsaw Zürich Beijing Hong Kong Melbourne Mumbai New Delhi Seoul Shanghai Singapore Sydney Tokyo

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