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The Confederation of British Industry (CBI) has today called for action to boost the link between executive pay and performance to further strengthen the current system of corporate governance.
Responding to the government's discussion paper on executive remuneration, the UK's leading business group said that pay must be squarely linked to performance with no rewards for failure. However, it outlined a number of areas where the remuneration process and the level of transparency could be strengthened.
Among the measures, the CBI is calling for are: greater transparency on the criteria used to set rewards, executive pay to be considered as part of a broader organisation-wide pay strategy and withholding performance-related pay in cases of poor performance.
Katja Hall, CBI Chief Policy Director, commented "high pay is only ever justified by outstanding performance."
"The current system of corporate governance is a robust mechanism for setting executive pay when it's applied consistently and effectively, and there are ways it could be strengthened further."
"Remuneration committees (RemCos) have a critical role to play in ensuring that pay is always squarely linked to performance."
"We believe remuneration committees should be bolstered by widening the pool of non-executive directors that serve on them and giving them greater scope to reduce or withhold rewards in cases of poor performance."
To strengthen the link between pay and performance, the CBI is recommending:
• Remuneration schemes should avoid complexity.
• The results on which reward has been calculated should be spelled out clearly in remuneration reports.
• A single aggregate figure, including share options and bonuses, for individual directors' pay should be included in annual reports in addition to other existing reporting
• RemCos should consider remuneration in the context of a company-wide pay strategy. This might be in the form of a ratio between the earnings at the top and elsewhere in the business. This would establish a reasonable internal benchmark for their firm, which is kept under review.
To build on the robust nature of the UK's existing system of corporate governance the CBI proposes:
• Business action to widen the pool of non-executive directors, including those taking part in RemCos.
• RemCos should examine the practicalities of greater use of measures to reduce or withhold performance-linked reward where business performance is not sustained in the longer term. In addition, shareholder groups should encourage greater use of claw-back provisions in companies, to apply in cases such as misstatement of results.