Last month, the Government confirmed in the Queen’s Speech it would bring in a bill to make shareholder votes on directors’ pay binding. It fell short on various proposals discussed over the past year, including one that would have forced companies to achieve a 75% majority to approve pay packages. Responding to the news, the TUC argued the Government needs to do more than make investors’ voting decisions binding, if directors’ pay is to be set at more realistic levels in future.
Charles Cotton, reward adviser at the Chartered Institute of Personnel and Development (CIPD)
There is nothing to stop remuneration committees (RemCos) being in touch with the 'real world' by examining how their organisations' executive pay practices relate to practices in the rest of the organisation. This could be done through staff surveys, focus groups, social media campaigns and so on.
One could also argue that an unforeseen consequence of the focus of executive pay over the past two decades is RemCos have ended up just looking at boardroom pay and performance, rather than examining pay within the whole organisation.
If anything, intervention in this area has led to one set of unforeseen consequences after another, from increased pay transparency making it easier for employers and executives to benchmark salaries; shareholder and institutional investor concerns resulting in firms just copying reward practices; the drive to link pay and performance resulting in more complex reward packages that neither the shareholders or the executives fully understand, and so forth.
The Queen's Speech proposals outlined by the Government last month could lead to micro- management of executive reward decisions by shareholders, to the speed of organisation action being reduced and to share- holders promoting different opinions about where the balance of reward should rest and the measures that should be used.
There are no easy answers to executive pay, but it is time for employers, shareholders and executives to decide themselves what is being rewarded, and how and why, in the context of each individual organisation.
We need simpler, less complex remuneration, and it looks as if executives may be prepared to accept less pay if more of it is stable.
We also need a greater appreciation at board level of the impact of good people management and how this can be made or destroyed by pay.
Jonathan Exten-Wright, partner at law firm DLA Piper
The Government is consulting on the whole issue of executive remuneration and has tabled a number of significant proposals.
One area for discussion is whether employees should be entitled to sit on a remuneration committee, to encourage oversight of levels of pay.
Such a move would be highly controversial in the UK.
The TUC has, perhaps inevitably, welcomed the suggestion, arguing the European experience demonstrates such a move would be successful.
That, however, overlooks the longstanding cultural approach in some European countries of co-determination at board level, not just on remuneration. The debate has principally been around aligning shareholder interests and executive remuneration rather than ushering in employee pay concerns and pay ratios.
The idea of shareholder engagement has been sufficiently challenging to establish in practice. This is because it is difficult to see how trade union representatives would improve oversight. Instead, the better options to explore seem to be the other proposals. These include a binding shareholders' vote on future remuneration policies, within which the remuneration committee would have to act. Another is to require shareholder approval of exit payments over an annual base salary.
This is more problematic, because it could ratchet up base salaries and/or potentially lead to delay and litigation between dismissal and settlement.
Ultimately, a lot will depend upon shareholder engagement. There there can be a whole spectrum of levels of activism depending upon the interest of the shareholder in particular major companies.
Nonetheless, a sea-change is clearly underway.
