Compensation & Benefits: The post-Walker corporate governance environment

Posted on 3rd January, 2010

Estimated reading time 5 minutes

Governance needs to be brought “back to centre stage” but will not be achieved through “box-ticking conformity”

So stated the final recommendations of the Walker report published in November 2009.


As reported in our article dated 9 November (see link in Resources below), there has been much ongoing debate and discussion regarding corporate governance in listed companies in both the banking and financial institutions and non-financial services sectors.

Sir David explained that, in his view, “the fundamental change needed is to make the boardroom a more challenging environment that it has often been in the past”.  However, in making his recommendations, Sir David noted that “overly-specific prescription that generates box-ticking conformity” does not guarantee effective corporate governance, confirming that this is still reliant on “the abilities and experience of individuals”.  There remains a need for “judgement and appropriate flexibility” within any prescriptive parameters which are set.

Sir David advocated “early preventative medicine through shareholder engagement” and recommended that the remit of the FRC should be extended to include responsibility for developing a Stewardship Code, which would place a ‘stewardship’ duty on institutional investors and fund managers, encouraging them to take a more active management role in the business in which they invest.

Furthermore, the final report proposed for many of its recommendations to be implemented by being included in a revised Combined Code.

The FRC has now published its final report in this area, indicating that it has found no evidence of “serious failings in the governance of business outside the banking sector”. It has also commenced separate consultations on its proposals to revise the Combined Code and the introduction of a new Stewardship Code, resulting from the recommendations of the Walker review (see link to article in Resources below).

Furthermore, in a formal acknowledgement of the new risk agenda currently emerging, the Association of British Insurers has amended its guidelines and released a new position paper which is intended to assist remuneration committees to “understand how shareholders expect” companies to apply these in “current conditions” (see link to article in Resources below).

Detail of the recommendations

Remuneration and Incentives

The report notes that “substantial enhancement” is required in board level review and monitoring of remuneration policies and issues.  Such enhancement would be achieved through a board remuneration committee setting “over-arching principles and parameters” of the remuneration policy throughout the company.

In addition, this committee should have responsibility for remuneration issues for all senior employees (whether at board level or otherwise) with any potential or actual influence on the risk profile of the company (referred to in the report as “high end” employees).

“High end” employees are those who either undertake a “significant influence function” in the company or whose activities will or may have a “material impact on the risk profile” of the company.

In using these terms, the report cross refers to the FSA Handbook and Remuneration Code.

The executive summary of the report notes that a function of the remuneration committee should be to ensure that “remuneration structures for all such “high end” employees are appropriately aligned with the medium and longer-term risk appetite and strategy” of the company.

One element of this would be to ensure that “high end” employees maintain a shareholding in the company.

In addition, vesting of unvested share awards should not be permitted as a matter of course if high end employees leave employment.

Disclosure of levels of remuneration of £1 million

Furthermore, the report recommends disclosure of remuneration for “high end” individuals earning £1 million or more.  The proposal is for disclosure to remain anonymous but to be done by reference to salary bands.  Disclosure should indicate salary, bonuses, deferred shares, any performance related long term awards and pension contributions.

It is likely that this disclosure requirement will be put on a statutory footing in due course, having been included in the Financial Services Bill, introduced on 19 November 2009 and currently progressing through Parliament.

Limits on and deferral of incentive payments

At least half of variable pay per year should be in the form a long term incentive award which is subject to a performance condition.  Half of such an award should vest only after at least three years, with the balance after five years.

All short term bonuses should be paid over three years, with two thirds of these bonuses being deferred.

Remuneration committees should also be required to disclose on a “comply or explain” basis whether the company’s remuneration policy for “high end” employees satisfies these criteria.

Claw back should be available in “circumstances of misstatement and misconduct”.

Other recommendations in overview

  • The chairman of the remuneration committee should face re-election the following year, where the directors’ remuneration report gets less than 75% approval of the shareholder votes cast;
  • Disclosure of any enhanced benefits which any high end employee has a right to receive.


‘FRC issues final report’

‘ABI- new executive remuneration practices’

 ‘Corporate Governance - what now for listed non-financial services companies?’

 ‘Report published on risk governance in non-financial service companies’

Walker report

For further information or to discuss the issues raised, please contact Guy Abbiss ( or Libs Davies ( on +44 (0) 203 051 5711.