Publicly-listed companies should be required to publish pay ratios between CEO and median pay and have an employee representative on their remuneration committee, the CIPD and High Pay Centre have said.
In a joint response to the government's green paper on corporate governance, the two organisations said a major re-think of governance is needed to improve CEO pay transparency and ensure boards recognise their broader responsibility towards the workforce
The two organisations said that if FTSE 100 CEO pay continues to increase at the same rate for the next 20 years as it has for the last two decades the average ratio between CEO and typical employee pay would increase from about 129:1 to more than 400:1.
They also called for publicly-listed companies to be required to set up human capital development sub-committees, chaired by the HR director, and for the government to encourage PLCs to report on set human capital metrics.
The recommendations to publish pay ratios and put workers on boards echo ideas that have previously been mooted by the government, although prime minister Theresa May backtracked over policy to make PLCs put workers on their boards.
CIPD chief executive Peter Cheese called for "a new system". “In our view it’s very hard to justify very high pay for executives if it is unconnected to the organisation’s culture and the rewards, contribution and performance of the wider workforce,” he said. “Many businesses need to fundamentally rethink how they create value for the long term and recognise fully the contribution of all their people, not just the few at the top.
“Let’s create a new system where decisions about executive pay are taken within a different context, one that places the firm’s human capital development – or workforce – at the heart of board decision-making."
Stefan Stern, director of the High Pay Centre, said that the conversation around pay at the top must be challenged to bring about better outcomes, and that mandatory approaches are needed.
"Voluntary measures and modest reforms have been tried but have not been effective," he said. “Twenty-five years after Adrian Cadbury first reported on reforms to corporate governance it is surely time to take bolder action. A healthier regime on top pay could have many positive consequences for UK businesses and for society generally. This could be the boost that 'Brexit Britain' needs."
However, a separate report from PwC suggests that the increase in CEO pay over the last three decades is justifiable.
The research shows that 80% of the increase in UK CEO pay since the early 1980s can be explained by the six-fold increase in the size of a typical FTSE 100 company in that time. The CEO pay market has a number of weaknesses, but overall pay levels are more readily explained by rational economic forces than is commonly assumed, it states.
It suggests a rethink in high pay incentives could be required. PwC's evidence shows that overuse of performance-based incentives can lead to short-termism, but by contrast, high and long-term shareholding are found to encourage better long-term performance.
Tom Gosling, head of the UK reward practice at PwC, said that while executive pay needs reform it is vital the focus is on the right issues. "If we wrongly diagnose the illness then the cure won’t work," he said. "We need to base reform on robust evidence.
“The most important area for reform is pay design, to ensure pay encourages long-term thinking and only provides the highest rewards for sustainable long-term performance. But it’s also vital for boards to improve oversight of pay fairness and to explain how they achieve this in a convincing way, to rebuild public trust in the pay process.”
The government's green paper was published in November 2016, and aims to strengthen big business through better corporate governance. Consultation on the green paper closes today.
