Emma Burrows, employment law specialist at Trowers & Hamlins Solicitors, takes a look at new guidance for Boards of RSLs.
New guidance for Boards of RSLs in relation to pay and conditions for senior executives has just been issued by the Housing Corporation. In its Good Practice Note dated June 2004, the Corporation focuses on payments to senior executives. The Good Practice Note sets out guidance to Boards of RSLs on ways in which they can effectively remunerate their senior executives without making unreasonably large payments.
This bulletin sets out the main points of the Housing Corporation’s guidance, although it is essential that Board members of RSLs read the Good Practice Note in full as it is not possible to summarise all its contents here.
Role of the Board
The Housing Corporation makes it clear that it is the Board of the RSL which is responsible for the terms and conditions of all its senior executives and that, while it may delegate some detail to a remuneration committee, final decisions rest with the Board itself. The Board needs to see worked examples showing the value in money terms of any obligations in a contract of employment and particularly those obligations arising on a termination of the contract. The Good Practice Note stresses that it is essential that Boards understand clearly the potential value in money terms of the total package.
The Board must also be convinced the package is reasonable in all the circumstances, is in the organisation’s best interests and is being implemented for clear business reasons.
If a merger between two RSLs is being considered, the Board will need to balance incentives to keep the senior executive team working to achieve the merger, against excessive payments to those who leave. It should consider the total severance costs against the efficiency savings expected from the merger and be satisfied that those savings can be recovered in a reasonable time.
Role of the Remuneration Committee
The role of the Remuneration Committee should be to design a remuneration policy that is appropriate to the needs of the organisation. Rewards should also be in keeping with the organisation’s objectives, whether or not these are charitable.
The remuneration policy should also cover questions of equal pay and provide for regular equal pay reviews. The Housing Corporation states that RSLs should work within the Equal Opportunity Commission’s Code of Practice on Equal Pay.
The Remuneration Committee should review all contracts periodically and ensure that all variations are made in writing.
The Good Practice Note emphasises that, whilst in the private sector shareholders can act as a check on excessive senior executive pay, there is no such check in the RSL sector and, to some extent, the Board has to take on this role and should consider how robustly they can justify the contracts to tenants and other stakeholders.
The Board should examine the whole contractual package before agreeing to it. The guidance states that the Board should take the following steps when deciding on senior executive salary levels:
(a) carry out independent analytical job evaluations;
(b) arrange for a comparison of salary levels within the marketplace to be made;
(c) evaluate how executive salaries and benefits fit in to the overall remuneration policy of the organisation; and
(d) benchmark total overall pay costs and senior management costs against key indicators such as per unit managed.
The Good Practice Note states that bonus payments should be tied to ambitious and objectively measurable
targets. Boards should also ensure there is a cap on the amount payable under any bonus.
The Good Practice Note also recommends that notice periods should not be unnecessarily long. It is suggested that, in practice, senior executives rarely work out their notice period. The result of this is that a longer notice period simply increases the severance pay.
The Housing Corporation suggests that one option that RSLs can consider is making phased payments whereby a payment in lieu is made in monthly instalments and if the former executive finds another post during the notice period, then the RSL will stop making the payments.
It is suggested that, at the time of drafting the contract, the Board considers severance payments. It considers that they should be particularly alert to any hidden costs triggered by a pension scheme. It encourages Boards to make it clear what payments executives will be entitled to on termination of their employment and not leave payments to the Board’s discretion.
In relation to pension enhancements, Boards must insist on getting forecasts as accurate as possible about the organisation’s potential liability based on actuarial predictions. The Good Practice Note states that RSLs are discouraged from buying added years of pensionable service under the Local Government Pension Scheme. If an RSL wants to buy added years, then it may need to apply to the Housing Corporation for a special determination to make the payment.
The Good Practice Note suggests that Boards will also need to appoint legal and other experts to advise them when recruiting new members of staff, drawing up contracts or negotiating redundancy or severance settlements. However, Boards will still need to consider the advice offered and exercise their own judgement drawing on their own expertise and skills as well as that of the advisors.
The Good Practice Note outlines the restrictions which Schedule 1 places on all RSLs. It advises that the 9th Exemption which permits non-contractual payments where an employee is dismissed on the grounds of a restructuring for efficiency gains, redundancy or early retirement should only be used where the Board feels the contractual payments are too low and that there are strong arguments for increasing them. It states that such cases should be the exception rather than the rule. The Good Practice Note also states that contracts should not be amended after a decision has been made about a merger or restructuring that is likely to result in redundancies or early retirement.
The Housing Corporation advises against including clauses in a contract that gives the organisation discretion to make additional payments as part of a severance settlement. It states it is better for the contract to have clear and quantified positions about the amount of any severance payment and the circumstances in which they will be paid. Organisations are encouraged to get professional advice on how to deal with discretionary payments and to consult their Lead Regulator so that they comply with Schedule 1.
In summary, the Boards of RSLs should be aware of the following:
- Pay and conditions for senior executives are the responsibility of the Board.
- All RSLs should have clear and explicit policies on pay, recruitment, severance and contracts.
- Levels of pay should be appropriate, balancing risk and reward, and reflecting independent evaluation.
- All payments, whether salaries, severance payments, pensions or other benefits, should be based on clear business reasons and should be in the interest of the association and its residents.
- At the outset, the Board should calculate the potential cost of the contract in money terms, examining all elements of the package, including the effect of notice periods and severance payments, and the circumstances in which these are paid.
- Terms and conditions of employment should be written clearly so that readers can understand them fully.
- There should be no automatic entitlement to bonuses, which should be tied to clear performance conditions.
- Contracts should not permit payments for failure.