Diversity in remuneration committees: a view from the inside

• Date: 12 April 2024
• Pages: 1208-1229
• DOI: https://doi.org/10.1108/EDI-07-2023-0245
• Published date: 12 April 2024
• Author: Susan Shortland,Stephen J. Perkins

Diversity in remuneration

committees: a view from the inside

Susan Shortland

The School of Organisations, Economy and Society (SOES),

Westminster Business School, University of Westminster, London, UK, and

Stephen J. Perkins

Guildhall School of Business and Law, London Metropolitan University, London, UK

Abstract

Purpose –The purpose of this paper is to understand how those involved in executive pay determination in

large publicly quoted UK businesses see the role of diversity within remuneration committees (Remcos) as

enabling the input of different perspectives, which can enhance their decision-making and potentially improve

pay outcomes.

Design/methodology/approach –Qualitative, semi-structured interviews were undertaken with 18 high-

profile major-enterprise decision-makers and their advisers, i.e. non-executive directors (NEDs) serving

Remcos, institutional investors, executive pay consultants and internal human resources (HR) reward

specialists, together with data from three focus groups with 10 further reward management practitioners.

Findings –Remco members recognise the benefits of social category/demographic diversity but say the

likelihood of increasing this is low, given talent pipeline issues. The widening of value diversity is considered

problematic for Remcos’functioning. Informational diversity is used as a proxy for social category/

demographic diversity to improve Remcos’decision-making on executive pay. While the inclusion of members

from wider social networks is recognised as potentially bringing a different informational perspective, the

social character of Remcos, reflecting their elite nature and experience of wealth, appears ingrained.

Originality/value –Our original contribution is to extend the application of upper echelons theory in the

context of Remco decision-making to explain why members do not welcome widening informational diversity

by appointing people from different social networks who lack value similarity.Instead, by drawing views from

employees, HR acts as a proxy for social network informational diversity. The elite, upper-echelons nature of

Remco appointments remains unchanged and team functioning is not disrupted.

Keywords Corporate governance, Diversity, Executive pay, Qualitative research, Remuneration committees,

Upper echelons

Paper type Research paper

Introduction

Board diversity is important because heterogeneity in the character of appointees to the most

powerful company roles results in increased capacity and opportunity for business

innovation under challenging competitive conditions (Vinnicombe et al., 2020;Wilson, 2021).

Indeed, the Financial Reporting Council (FRC), the UK corporate governance regulator, has

warned about “problems arising from groupthink”(FRC, 2014, p. 2) when boards exhibit a

lack of diversity. An observation by former UK Prime Minister, the Rt. Hon. Theresa May

exemplifies this concern: “Too often the people who are supposed to hold big business

accountable are drawn from the same, narrow social and professional circles as the executive

team”(House of Commons Business, Energy and Industrial Strategy Committee, 2017, p. 50).

In the light of such criticism, corporate governance principles have sought expressly to

increase heterogeneity among those accountable for executive pay decision-making. In

2020, the FRC specified expectations of those who invest and the institutions that manage

investments in stock market listed businesses. The UK Stewardship Code (FRC, 2020)

EDI

43,7

1208

The authors wish to thank Laura Baker for her assistance in the design of Figure 1.

Funding: There is no funding for this paper.

The current issue and full text archive of this journal is available on Emerald Insight at:

https://www.emerald.com/insight/2040-7149.htm

Received 30 July 2023

Revised 8 December 2023

11 March 2024

Accepted 21 March 2024

Equality, Diversity and Inclusion:

An International Journal

Vol. 43 No. 7, 2024

pp. 1208-1229

© Emerald Publishing Limited

2040-7149

DOI 10.1108/EDI-07-2023-0245

states that among the factors investors and their representatives should consider is the

interplay of diversity, remuneration and workforce interests. Notwithstanding this, media

attention has continued to focus on what is viewed as excessive executive remuneration in

Financial Times Stock Exchange (FTSE) 100 firms. When this is set within the context of

the current cost of living crisis, the spotlight falls upon those who are responsible for

executive pay decision-making, namely non-executive directors (NEDs) serving on

remuneration committees (Remcos) [a summary of the function and processes of Remcos

is given in Appendix].

The FRC has recently announced a review of the UK Corporate Governance Code (FRC,

2022), to inform updated regulation that will apply to accounting years commencing on or

after 1 January 2025. The consultation document (FRC, 2023) states the intention to

strengthen the Code’s provisions expressly to support the diversity of skills and experience

on boards and, by extension, Remcos. Hence, examining how the regulatory expectations of

greater diversity may be embraced by those involved in executive pay determination

provides important implications for practice.

Our research is both timely and has practical significance. Our aim is to provide a

qualitative study of diversity in Remco membership. We set out to address a gap in our

knowledge by exploring insiders’views on widening Remco diversity and the potential

impact of this on executive pay decision-making. Our objectives are to inform our practical

recommendations through a thematic analysis of interview transcripts from those actors

directly involved in deciding executive pay outcomes (NEDs), as well as their external

consultants and internal HR advisers (reward specialists) and institutional investors whose

votes are crucial to the decisions made (Stathopoulos and Voulgaris, 2016). In so doing, we go

beyond what has been surfaced by quantitatively-oriented analysis dominating this research

area (Ogden and Watson, 2012).

Shortland and Perkins (2023a) find that while NEDs and institutional investors

acknowledge that the inclusion of worker representation could bring a moderating

perspective to top pay decision-making, their direct participation in the Remco is

unwelcome as it dilutes its unitary nature and accountability. While there is evidence for

homophily, namely that board/Remco members prefer to interact with those in similar

social networks (Hudson and Morgan, 2022), the elite nature of those involved in Remco

decision-making is crucial: it reflects individuals at the highest societal levels (Perkins

and Shortland, 2023). We thus theorise the character of Remcos under the rubric of upper

echelons theory (Hambrick, 2018;Hambrick and Mason, 1984;Neely et al.,2020). Our

study extends Shortland and Perkins’s (2023a) research by adopting a specific focus on

seeking the views of the inner Remco circle and their advisers on how diversity can be

widened in the context of top pay decision-making. We apply our theoretical analysis to

Jehn et al.’s (1999) seminal paper which presents a three-fold diversity framework (social

category, informational and value diversity) in the context of work group performance, in

this case Remco executive pay decision-making. Our theoretical contribution is to extend

the application of upper echelons theory into approaches to meeting diversity

expectations as applied to Remcos. Our original contribution is to theorise and explain

why informational alternatives that do not rely on extending Remco composition through

inclusion of individuals representing a more diverse range of social networks are

welcomed by executive pay decision-makers in their efforts to address corporate

governance diversity requirements and potentially moderate top pay excesses. Our

research question is:

RQ1. How do those involved in executive pay governance view diversity in Remcos and

its influence on executive pay decision-making?

Diversity in

remuneration

committees

1209