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The Actuary The magazine of the Institute & Faculty of Actuaries

ABI issues guidance on board effectiveness and executive pay

According to the trade body the documents provide UK boardrooms with clear indications from institutional investors on executive pay and effective performance.

The report on Board Effectiveness focused on three key issues that are held to make an effective board: board diversity, succession planning and board evaluation.

The ABI added that it had highlighted existing best practice amongst FTSE 350 companies and made clear that greater progress and transparency on these issues was needed to ensure an effective board and a successful company.

The revised Principles of Remuneration were first published in the 1970s and were last updated in 2006. The association stated that its members believe that non-executive directors have a key role to play in determining the appropriate remuneration and shareholders should be actively involved without micromanaging companies.

No payment for failure
It listed that company boards should support appropriate rewards for exceptional performance but strongly resist any payment for failure. The publication also warned against engaging in crude benchmarking to justify pay increases and argued that companies needed to understand that excessive or undeserved remuneration undermined the efficient operation of the company and damaged reputations.

Otto Thoresen, director general of the ABI, said: "Effective boardrooms should be the powerhouse of the UK economy.

"The board effectiveness report and long standing remuneration guidelines represent UK best practice. They aim to ensure that remuneration is linked to performance and shareholders' interests are protected."

Mr Thoresen concluded: "We continue to favour evolution, building on what we have learnt from recent years to make sure companies act in shareholder's interests and deliver long term economic growth that will benefit society as a whole."

[Source: Insurance Age]

Commenting on the proposals, Sean O'Hare, partner in PwC's HR and remuneration practice, said:

"It's positive that the ABI recognises that to improve boardroom composition and performance, it is often below board level where change is really needed. Firms have to nurture and retain talent up through the ranks, defining skills needed at board level and mapping these against potential candidates. However, difficult economic conditions are likely to put pressure on the diversity, development, and training programmes that are essential to making this happen."

"The ABI has revised its guidance into a set of principles, with less prescription on what companies should be doing. This is good news - indeed the report states it is not the role of shareholders to micro manage companies, a point that is often lost in discussions around executive pay.

"The ABI's main point on quantum levels of pay is that these should be appropriate to the business, reflecting the challenges of tackling this area. The ABI recognises that benchmarking pay against peers has played a part in ratcheting up quantum pay, but also that peer group comparisons are important for deciding pay. On this point companies are caught between a rock and a hard place.

"Like the BIS proposals of last week, the guidelines reinforce the suggestion that boards must consider the impact of executive remuneration on the company's finances. Interestingly they also go further by emphasising that the whole board should consider the impact of employee remuneration on the sharing of value with shareholders and investment activity.

"The revised guidelines also have a much stronger endorsement of discretion, whereby remuneration committees have some room to adjust pay schemes to ensure they reflect corporate performance, albeit within pre-agreed guidelines. This makes particular sense given the current economic environment, as in some cases the formulaic outcomes of pay plans may no longer be appropriate. The importance of clawback is also emphasised, so the ABI should be reassured by a recent PwC survey of major organisations that showed that a third were planning to introduce clawback in 2012."