Mercer submitted a response to the UK Department of Business, Innovation and Skills' enquiry on executive pay, directors' duties, and boardroom composition. The document summarizes Mercer's perspective, identifying three key areas for improvement: (1) increasing transparency throughout the investment chain, (2) better succession planning to develop internal senior executives, and (3) promoting corporate cultures that embrace diversity and dissent. Mercer argues these steps can help strengthen governance, better align pay with performance, and support sustainable long-term growth.

1. H E A L T H W E A L T H C A R E E R
THERE(SA) MAY BE TROUBLE
AHEAD!
MERCER’S PERSPECTIVE ON THE BIS
ENQUIRY
8 NOVEMBER 2016

2. T H E R E ( S A ) M A Y B E T R O U B L E A H E A D !
M E R C E R
CONTENTS
Introduction........................................................................................................................................ 1
Building on an improved foundation................................................................................................ 2
Transparency throughout the entire investment chain................................................................... 3
Better supply of senior executives................................................................................................... 4
Corporate culture that enables change............................................................................................ 5
Paying for perfomance ...................................................................................................................... 7
Conclusion ......................................................................................................................................... 8
Contacts ............................................................................................................................................. 9
References ....................................................................................................................................... 10

3. T H E R E ( S A ) M A Y B E T R O U B L E A H E A D !
M E R C E R 1
INTRODUCTION
MARK QUINN, UK BUSINESS LEADER, TALENT
When Theresa May took office on 13 July 2016 she placed
social justice at the centre of her government’s agenda.
Executive pay is clearly “front and centre” in her thinking1
,
demonstrated not only by the tacit backing of the high pay
centre proposals2
but also by the enquiry launched on 16th
September by the Department of Business, Innovation and
Skills (BIS).
The focus of the enquiry – on “executive pay, directors’
duties, and the composition of boardrooms, including worker
representation and gender balance in executive positions” –
was clearly reinforced by concerns around recent high profile
allegations of malpractice at BHS and Sports Direct.
Mercer submitted our response to the Select Committee on 26th
October and we are delighted to
share with you our perspective and observations on the consultation and the themes we hope will
shape the debate and any future regulation or legislation.
We firmly believe that there are improvements available, although these will require a broad set of
actions which extend beyond the normal boundaries of “executive remuneration.”
I’d like to thank Mercer colleagues who contributed time, insight and commitment across a
manifold set of areas of expertise from executive rewards to pension governance, investor support,
inclusion and diversity, and leadership development. I hope you enjoy the read and we look
forward to discussing these issues with you.
Mark Quinn, UK Market Business Leader, Talent
Mercer | Tower Place West, London, EC3R 5BU, UK
P: +44 (0)20 7178 3341
M: +44 (0)7557 031051
mark.quinn@mercer.com

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1
BUILDING ON AN IMPROVED FOUNDATION
The BIS consultation provides a sense of direction of where the government thinks opportunities
for improvement may exist. We believe it’s important to consider what has changed since 2012,
when a consultation on revised remuneration reporting regulations was started by BIS under Vince
Cable.
The Cable consultation was focussed on improving transparency in the Director’s Remuneration
Report, which we believe successfully re-oriented the UK to be the first major economy globally to
think in terms of realised pay (i.e. the amount actually earned by executives after all performance
outcomes) rather than granted pay (i.e. the maximum potential or estimated future value of pay).
We consider these measures well considered and implemented – a compelling example of how
improving transparency is a route to improving our economy and society through non-intrusive
regulation.
Below is an example of the kind of insight which was enabled by the BIS review of 2012. It shows
that (contrary to the media narrative) once one controls for the distorting factor of company size
(significant in a moving market), pay has remained relatively stable at median, quartile and decile
level over the past 5 years.
Figure 1: FTSE350 CEO pay distribution 2012-2016
From this foundation we have considered the current consultation and have identified three areas
that could positively contribute to corporate governance and executive remuneration:
A. Transparency throughout the entire investment chain;
B. Better supply of senior executives; and
C. Culture that enables change.
lower decile
lower quartile
median
upper quartile
upper decile
£0
£1,000
£2,000
£3,000
£4,000
£5,000
£6,000
2012 2013 2014 2015 2016
CEO 'Single
Figure' of
remuneration
(size adjusted,
£'000)
Year (ending June)

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A. TRANSPARENCY THROUGHOUT THE
ENTIRE INVESTMENT CHAIN
Directors of UK PLCs have to be re-elected by shareholders annually - a measure that in theory
should make directors completely accountable to their company’s owners. However, we perceive
more than a little reluctance on the part of shareholders to exercise this right, so suggested to the
government that institutional shareholders should be required to disclose how they vote at AGM
and whether they use proxy advisers. This should be part of a wider rebalancing of influence from
fund managers and investment managers to the ordinary saver or pensioner.
The average pension pot in England is estimated at over £91,0003
however the average pensioner
has no oversight of the investments made with their money. Better and farther-reaching
transparency in the investment process would encourage institutional shareholders to vote more
actively on company policy, and be better held accountable by the ultimate owners of capital.
In relation to questions on shareholders’ role in the nominations committee process, we believe
these measures would reduce the non-executive directors’ reliance on the patronage of the
Chairman and the executive directors in those (few) cases where this may be seen to be an issue.
Similarly, a greater level of transparency around the nominations process would we believe
strengthen, both the perception and the reality of genuine independence of the non-executive
directors.
The BIS reporting requirements implemented in 2012 are an example of transparency-focused
legislation. Below, we can see that in the years following the regulations the correlation between
CEO pay and Total Shareholder Return (TSR) outperformance almost doubled while the
relationship also became more positive. By providing actors in a system (in this case institutions,
shareholders, and directors) with better information we can enable that system to become a more
equitable representation of the interests of all stakeholders – including pensioners and savers.
Figure 2: FTSE350 CEO pay performance alignment, 2013 and 2015
R² = 30%
R² = 17%
50% 70% 90% 110% 130% 150% 170%
CEO 3-year
'Single Figure'
of total remuneration
(size adjusted)
TSR Outperformance (% of Sector Median)
2015
2013

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M E R C E R 4
B. BETTER SUPPLY OF SENIOR
EXECUTIVES
In our experience insufficient attention is given in companies to:
i. the development of credible internal successors to CEOs;
ii. succession plans with real organisational weight; and,
iii. developing the pipeline of future leaders with longer-term time horizons to CEO.
The market for senior executives is highly competitive with substantive evidence of companies
paying millions to ‘superstar’ CEOs recruited from outside their organisations. Yet our analysis
shows that internally promoted candidates provide stronger sustained performance and have
comparatively moderate levels of pay.
Looking over the past 10 years, FTSE100 companies with a single internally developed CEO (i.e.
spent a minimum of 3 years at the company before being promoted to CEO) have provided a
median 10.8% return p.a. to investors compared with median 8.1% p.a. for companies with a single
externally hired CEO (i.e. became CEO in 6 months or less after joining the company).
In fact, an investor who invested £1-per day in FTSE100 companies with an internally developed
CEO since 2006 can expect to be almost £1,000 better off those investing in equivalent companies
making external hires. This relationship holds true for companies with multiple CEOs over the
period.
Additionally we can see that internally developed CEOs are also paid 28% less on average.
Figure 3: investment*
performance of FTSE100 companies vs CEO type**
*‘Investment performance’ is value of £1 per day invested since October 2006
**Companies with multiple CEOs over the period are excluded
Single externally hired CEO Single internally developed CEO
£8,163
£3,683
£5,373
+ £976
£8,009
£4,382
£6,349
upper
quartile
lower
quartile
median
upper
decile
lower
decile

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M E R C E R 5
If promoted CEOs provide higher returns (and are paid less) than hired CEOs then surely
improving succession is an urgent practical step that should be supported by government and a
point of focus and action for investors and companies.
Whilst processes to support talent management and succession planning are in place at most
large companies we recommend these processes become explicit duties of the directors and the
board; potentially explicit tasks delegated to the nominations committee. Thereafter the
nominations committee processes could be subject to disclosure in a similar manner to the
remuneration committee. Our experience of remuneration committees who look at pay in
conjunction with talent management is a wholly successful one.
C. CORPORATE CULTURE THAT ENABLES
CHANGE
Evidence shows Companies (like societies) thrive when diversity in all its dimensions is
encouraged, and dissenting voices have a space to be heard. We recommend that the government
take steps to increase the Board’s accountability for developing and maintaining a strong healthy
corporate culture. One where difference is embraced and respectful challenge is encouraged.
We also recommend that the government consider making this an individual duty of each director;
both executive and non-executive. The board should be supported to collectively develop a strong
and healthy culture because we know culture cascades downwards through an organisation from
the top. Workers inherit their work agenda from their managers after all; leaders cast increasingly
long shadows in today’s fast moving organisations.
By investing in culture, close-focussed attitudes absorbed with short-term organisational
performance and personal gain can be replaced with ones that focus on inclusion and sustainable
growth – and through this prosperity and job security for all employees. There are many
organisations4
where one can see the results of this focus on culture in their sustained
performance over time, and at Mercer we both advise and learn from ‘corporate culture
superpowers’ through our Responsible Employment Network5
. In the context of the consultation we
suggest that promoting a culture of inclusiveness vertically through the organisation hierarchy is
less problematical than having a worker representative on the board.
Improving diversity in the workplace is not only important for us as a society; it improves business
performance too6
. Diversity encompasses a wide range of dimensions, from the demographic
representations such as gender (women and men) to race/ethnicity, age, religion, to education and
socio-economic background.
In order to promote diversity of thought, thinking style, and perspective in the boardroom, we
suggest to the government that organisations need to change their normal attraction and
recruitment methods to tap into non-traditional recruitment pools. This can be done through a
range of activities including creating relationships with a diverse range of schools and universities,
assessing their employer brand, and evolving their employee value proposition to cater for different
needs.

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Mercer research shows us that the route to executive positions is heavily correlated with having
responsibility for “P&L” (profit and loss) and operational responsibility. Organisations need to
examine the career paths in their organisation, the gateway roles for key positions and how people
– particularly women – are directed and supported into them.
We also highlighted the need for ‘diversity retention’. Our When Women Thrive global gender
research clearly shows that many organisations are focussing on buying in female talent at the top
of the organisations, but equally the research shows that women leave at a higher rate than men,
creating a revolving door effect. This signals that the culture of the organisation may not be
supporting diversity (in this case gender).
A requirement for companies to report the findings of the Board effectiveness review as it pertains
to culture could ensure that the process of setting and maintaining a strong and healthy culture
receives due weight.

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M E R C E R 7
2
PAYING FOR PERFOMANCE
Putting aside issues of quantum and broader governance, we know our clients – be they in
management or non-executive positions – remain relentlessly focussed on ensuring pay outcomes
are aligned to performance and achievement. We know that this is often an elusive goal, and can
be hindered by sensationalist media coverage and flawed analyses. As we noted at the start of
this document, correlation has improved over time and pay levels have remained stable – and it is
a small group of offenders (often repeat offenders) who hijack the column inches.
Figure 4: CEO pay / performance alignment, FTSE30
As we identified in our recent Best Value for Money CEO7
analysis, for every overpaid Chief
Executive, there are excellent examples of others who have delivered great value to shareholders
for more modest pay, and also companies where pay closely reflects changes in and levels of
absolute and relative performance.
-20% -10% 0% 10% 20% 30% 40%
CEO Pay
3-year avge
Single Figure
size adjusted
Company Performance (annualised TSR)
'Zone of Fair Pay'
favourable to
management
favourable to
shareholders

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3
CONCLUSION
It is important to recognise the long-term development of corporate governance against the relative
economic background that stretches from the Cadbury report in 1992 to the current enquiry and
the current day. Across that timeframe there have been economic “jolts” which have been felt
across our society, most notably the financial crisis of 2008 and the recession that ensued.
After prolonged periods of consultation and review, including the furthest reaching re-regulation of
financial services since the city was first deregulated, we are now living in a time where corporate
governance standards have been raised and as a result our economy should be more resilient
than a decade ago. Nonetheless we know there is political and economic uncertainty ahead.
Figure 5: Performance of FTSE100 since 1985
Source: Yahoo Finance
Good governance can try and ensure that business is conducted in a sustainable way that can
withstand shocks, but of course there is always more that companies can do than merely comply
with regulations.
At Mercer, we have a wealth of experience helping growing and mature companies navigate the
complex and moving landscape of corporate governance. Additionally we have industry leading
knowledge around pay for performance measurement, succession planning, leadership
development, pensions, investment and culture that far surpasses what is required by law – and
we believe passionately that these can be a source of competitive advantage when employed in a
thoughtful and progressive way.
We hope that by sharing the insights we submitted to the government last week, we can help
companies stay one step ahead by giving them access to the best practice of tomorrow, today.

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CONTACTS
If you need support producing a transparent and compliant Directors Remuneration Report or
incentive plan, please contact sophie.black@mercer.com
If you would like to learn more about gender diversity, equality reporting, and inclusive culture,
please contact chris.charman@mercer.com
If you would like to join our responsible employers network or Britain’s Healthiest Workplace,
please contact agnieszka.brzezinska@mercer.com
If you need to accurately calibrate senior management performance and pay please contact
matthew.yerbury@mercer.com

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4
REFERENCES
1. Daily Telegraph (Jul 2016) Theresa May to unveil plans to end 'fat cat' culture in some of
Britain's biggest companies
2. Philip, Chris (2016), Restoring Responsible Ownership, High Pay Centre
3. http://www.thisismoney.co.uk/money/pensions/article-3326892/The-pension-pot-map-UK-
revealed.html
4. Boyce et al (2015) “Which came first, organizational culture or performance?” A longitudinal
study of causal priority with automobile dealerships Journal of Organizational Behavior
5. Mercer’s responsible employment network
6. McKinsey & Company (2015), Why Diversity Matters
7. Financial Times (2016) Best Paid CEOs fail to offer Best Value for Money

13. M E R C E R
www.mercer.com