Remuneration committee

65. Carillion's board and its remuneration committee (RemCo) attempted to present its remuneration policy as unremarkable. RemCo Chair, Alison Horner, told us that its policy was for executive pay to be "mid-table", the industry median.233 Benchmarking analysis commissioned from Deloitte by the RemCo in 2015 showed Carillion paid relatively low total Chief Executive remuneration.234 As a result of this benchmarking, Richard Howson's basic salary was increased by 8% in 2015 and 9% in 2016.235 His total remuneration jumped from what he recalled to us as "something like £1.1 million or £1.2 million" to £1.5 million in 2016.236 Philip Green was awarded a 10% increase in his fees as Chairman in 2016, from £193,000 to £215,000, again based on benchmarking.237 Carillion's wider comparable workforce received just a 2% pay rise in 2016.238

66. Remuneration based on industry medians generates a ratchet effect: by raising their pay to the median, companies increase the median itself. This method of reward can also detach pay from the performance of both the individual and the company. The generous increases paid to Mr Howson, Mr Green and other senior staff in 2015 and 2016 came despite declines in the company's share price.239 Remuneration for Carillion's senior leaders included the potential for an annual bonus of up to 100% of basic pay, split evenly between financial and other objectives.240 In 2016, Mr Howson received a bonus of £245,000 (37% of his salary) despite meeting none of his financial performance targets.241 Murdo Murchison of Kiltearn Partners described this as a "complete disconnect" between financial performance and pay. He said the policy gave the board "a great deal of freedom to pay what they want to pay" to directors who failed to meet "fairly easy" financial targets.242

67. The RemCo told Carillion's shareholders in December 2016 that it intended to increase the maximum bonus available to 150% of salary, to "attract and retain Executive Directors of the calibre required".243 Investors such as BlackRock protested in private about these changes,244 and the RemCo was forced to abandon its plans in March 2017.245 Nonetheless, at Carillion's 2017 Annual General Meeting, around 20% of investors voted against the motion to approve the board's remuneration report. Kiltearn noted the continued growth of Richard Howson's pay as a cause.246 In the RemCo and board papers we have seen, there is no evidence that the sizeable opposition to the remuneration policy prompted any reassessment of their general approach.

68. This was evidenced by the RemCo's remarkable decisions at the time crisis publicly struck the company. Amra Balic, Managing Director at BlackRock, told us that, at the time of the 10 July 2017 profit warning, Carillion's board was "thinking again how to remunerate executives rather than what was going on with the business".247 RemCo papers from 9 July 2017, the day before the first profit warning, show it agreed to offer retention payments to five senior employees to remain with the company until 30 June 2018, and salary increases of between 25 and 30% "in the light of the very considerable burden likely to fall on certain roles".248 It also took the decision to pay the new interim Chief Executive (and former member of the RemCo) Keith Cochrane a fee of £750,000 for the role, notably higher than his predecessor's basic pay.249

69. An effective board remuneration policy should have the long-term success of the company as its only goal. Carillion's RemCo was responsible for a policy of short-term largesse. In the years leading up to the company's collapse, Carillion's remuneration committee paid substantially higher salaries and bonuses to senior staff while financial performance declined. It was the opposite of payment by results. Only months before the company was forced to admit it was in crisis, the RemCo was attempting to give executives the chance for bigger bonuses, abandoned only after pressure from institutional investors. As the company collapsed, the RemCo's priority was salary boosts and extra payments to senior leaders in the hope they wouldn't flee the company, continuing to ensure those at the top of Carillion would suffer less from its collapse than the workers and other stakeholders to whom they had responsibility. The BEIS Committee is considering some of these issues as part of its current inquiry into fair pay.250