We could learn much from the private sector on pay

The private sector can teach us something about remuneration, writes Ray Jones

Ray Jones
Ray Jones

Executive pay - whether in banks, quoted companies or the public sector - has been high on the press agenda for some years. So it was unsurprising that this summer saw the focus move to the charity sector. Senior remuneration is a sensitive issue in all sectors, and any suggestion that executive pay could divert resources away from charity beneficiaries is damaging to trust.

The National Council for Voluntary Organisations recently set up an executive pay inquiry to explore the issues, including how appropriate levels of pay for senior charity executives should be arrived at, and will examine how pay levels affect public trust in charities. The commission welcomes this move and, indeed, a member of our board sits on the panel.

So this is a good time to look at how financial reporting in the commercial sector has addressed the issue of executive pay and to assess how this might influence charity reporting.

The UK has a tradition of pioneering developments in corporate governance through a 'comply or explain' approach to reporting. The UK Corporate Governance Code, which applies to quoted companies, sets out expectations of behaviour and then allows shareholders to assess the quality of governance arrangements through financial reporting disclosures. A guiding principle of the code is that "levels of remuneration should be sufficient to attract, retain and motivate directors of the quality required to run the company successfully, but a company should avoid paying more than is necessary for this purpose" - a principle that could easily fit into charity sector guidance.

Good Governance: A Code for the Voluntary and Community Sector, a guide produced by several sector bodies, is an excellent document, but says little about executive pay other than pointing out the need for "proper and formal arrangements". Looking closely, it becomes clear that managing the relationship between the chief executive and trustees is a central theme underpinning that code. For quoted companies, it's the role of the remuneration committee to set pay, and this helps to mitigate the conflict of interest arising from a remunerated executive. Voluntary trusteeship removes conflict of interest and gives strength to voluntary sector governance.

A further source of influence for NCVO's work might be the Companies Act and regulations introduced this October, which emphasise transparency of remuneration disclosures and the requirement for shareholder approval of remuneration policies.

The Exposure Draft of the new charities Sorp anticipated the current debate by asking whether the Sorp's existing remuneration disclosures needed to be enhanced. Some have already suggested that a remuneration policy statement would be a useful addition to charity annual reporting.

The US Securities and Exchange Commission voted in September to propose a new rule that would require public companies to disclose the ratio of the compensation paid to their chief executives to the median compensation of its employees. Perhaps in charities, the ratio of total senior management pay to total charity spend might be even more relevant.

Ray Jones is policy accountant at the Charity Commission

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