Companies will need to justify high levels of executive pay under plans outlined in a government green paper.
One of the proposed measures is the publication of pay ratios, which would show the gap in earnings between the chief executive and an average employee. Shareholders would also have the ability to vote against salaries they believe are excessive.
Prime minister Theresa May said she wants to ensure "everybody plays by the same rules". "We have seen an irresponsible minority of privately-held companies acting carelessly – leaving employees, customers and pension fund beneficiaries to suffer when things go wrong," she said.
The announcement is a continuation of May’s scrutiny of corporate governance and her statements that the government wants to "build an economy that works for everyone, not just the privileged few".
Charles Cotton, pay and reward adviser at the CIPD, said the HR professional body welcomed the announcements.
“The publication of pay ratios is a welcome first step in addressing the broken system of executive pay,” he said. “Alongside the presence of employees on remuneration committees, they will help build greater transparency over executive salaries and bonuses, and should encourage organisations to ensure there is a clearer link between overall top pay levels, organisational performance and the rewards of the wider workforce.
“This is not about naming and shaming companies, but instead encouraging open conversations about what’s being rewarded and recognised at each grade, how, when and why. This is a win-win for business, as CIPD research shows that disproportionate levels of CEO pay is a huge issue for employees, with 59% citing it as a reason they are demotivated at work.”
However, TUC general secretary Frances O’Grady described the proposals as “disappointing”, referring to May's rowing back of plans to force companies to put workers on boards. In the paper the government says companies "should be able to select the mechanisms most appropriate for their business" when it comes to listening to employee voice.
“This is not what Theresa May promised,” O'Grady said. “[The] proposals are disappointing and will not do enough to shake up corporate Britain. We need the voice of elected workers in the boardroom, rather than on advisory panels. The prime minister vowed to govern for working people. She should let them have a say where it really matters.”
The paper also announces plans to hold privately owned companies to the same corporate governance standards as publicly listed ones.
The green paper is part of a wider government review of modern business practices, which includes RSA chief executive Matthew Taylor's work on employment practices and diversity on boards, and the Parker and Hampton-Alexander Reviews for BAME board representation and female executive representation respectively.