Senior management pay: dimensions of pay policy in business and the higher education sectors

Coincidentally, at about the same time that the higher education sector announced that it would publish draft guidance on executive pay (Times Higher Education, 14 December 2017), the Financial Reporting Council (FRC) was also issuing its proposals for a comprehensive review of the Corporate Governance Framework, which sets the basic expectations for FTSE listed entities on governance matters, including remuneration.

The FRC notes that there is a high degree of compliance with the existing Code, and the purpose of the revision is therefore largely to simplify the Code to ensure it is fit for purpose in the years to come.  Yet one of the striking features of recent corporate governance has been the issue of executive pay, suggesting that thus far the Code has not come up with an approach to prevent this attracting bad headlines.  Indeed, the proposed revisions sort of make this point: the consultation highlights the importance of corporate governance in ensuring that remuneration policy works well for the company; and also highlights that AGM resolutions on remuneration (either policy or practice) attract more opposition than any other.  In other words, corporate governance is important in setting remuneration policy and levels for executives, but so far it has yet to make the issue go away amongst investors (let alone the public at large).

In many ways, however, the Corporate Governance Code is way ahead of the higher education sector.  In the latter, it is only now being proposed that vice-chancellors should not sit on the remuneration committees that decide their pay, something that is already strongly discouraged in the Code.  For those who have studied the Corporate Governance Code over a number of years, the fact that this approach still exists in higher education is revealing of how far university governance lags behind that of leading UK businesses.

But the existing evidence on the Code suggests that, even if universities bring themselves more in line with what is regarded as good practice in governance, it won't make the problem of executive pay go away.  So what might?  One way might be to rethink how choices are made and explained about executive pay.

Usually, the public explanation for a particular salary or bonus is that the sum announced is the 'market rate' for the kind of person the university wishes to employ.  This probably means that few people move for less money, so the university in question has taken that person's existing salary, added a bit on, and come up with the new figure.  In other words, there is a permanent inflationary spiral in executive pay.  The consequence of this is that the issue is bound to recur in the media and amongst stakeholders, because increases are inevitable.

The headlines about pay might be (and are, frequently) dismissed by senior business and university figures as a lot of froth and not much substance; but they create a particular image, nonetheless.  So, one question for both businesses and universities might be: does that image matter to you.  Or, put another way, how far is the reputation of the institution factored into decisions about executive pay?  Because, where people have a choice, reputation matters.  This is particularly the case in England, where students might be tempted to make a link between the level of fees they pay, and the remuneration received by the de facto chief executive of the university to which they have applied.  And whilst individual shareholders might not have much influence over corporate executive pay, the institutional shareholders (like pension funds) certainly can do, and their choices would be felt by corporations.

It would not harm either universities or businesses to set out the criteria by which they will set remuneration for executives.  We can only hope that there are criteria there beyond 'the market rate'.  But I would be willing to bet that 'reputation' is not currently there for the majority.  This is unfortunate, because it then personalises the issue when it arises.  It moves from being an issue of policy (which is the problem) to the personal greed of the executive who takes the money (which is problematic, because let's be honest, how many of us would turn down a salary and ask for less money?).

So, this might be the challenge under the new Corporate Governance Code, and the guidance on executive pay in the higher education sector: explain how these choices are being made, and discuss them with your stakeholders before the decisions are actually made.  Take the personalities out of the issue, and put the attention where it belongs: the actual practice of corporate governance in both business, and the higher education, sectors.

Sources used
Times Higher Education
https://www.timeshighereducation.com/news/new-guidelines-set-steer-uk-v-cs-away-pay-panels

Financial Reporting Council, Code of Corporate Governance (2016)
https://www.frc.org.uk/getattachment/ca7e94c4-b9a9-49e2-a824-ad76a322873c/UK-Corporate-Governance-Code-April-2016.pdf

Financial Reporting Council, consultation on revisions to the UK Code (2017)
http://www.frc.org.uk/getattachment/31897789-cef6-48bb-aea9-f46b8cf80d02/Proposed-Revisions-to-the-UK-Corporate-Governance-Code-Dec-2017-1.pdf