Companies should adopt simpler pay structures, with reduced reliance on performance-based pay, according to a report from think-tank the Big Innovation Centre.
The Executive Remuneration Policy Report suggests that cash bonuses should be limited to at most 25% of incentive pay and given on reaching non-financial and strategic goals rather than financial ones.
It suggests that companies should be required to publish a Fair Pay Charter that sets out their principles on pay fairness, comparisons between CEO and wider workforce pay over time, and a requirement to engage with employees on its content through an appropriate forum.
However, the report rejects the concept of forcing companies to publish pay ratios, something the government is expected to announce in a green paper on corporate governance this week.
It says that "although well-intentioned, snapshot pay ratios by themselves have the potential to create misleading comparisons and perverse incentives". It points out that pay ratios can be skewed by companies outsourcing to low-paid workers, and that certain industries, such as retail, which have a large base of lower-paid workers will inevitably have wider ratios than higher-paid industries such as financial services.
The report also rejects the idea of binding votes on executive pay, saying there is not "a clear case" for it. The government is expected to introduce binding votes on executive pay in its green paper.
Clare Chapman, non-executive director of Kingfisher, NED at Heidrick and Struggles and member of the Big Innovation Centre's 'Purposeful Company' taskforce, said that UK businesses need to rethink how they achieve growth in a changing environment.
“We support the government's objectives of rebuilding trust in executive pay, ensuring it is linked to long-term performance, and giving shareholders the right powers,” she said. “This report provides positive solutions for achieving those objectives, based on the best available evidence. Radically rethinking how pay can support long-term behaviour is now the imperative."
Will Hutton, chair of the Big Innovation Centre, described the report's proposals as "feasible", and said they "reframe" the government's ideas. “If adopted [they] could really move the dial on executive pay, link it more to the achievement of purpose and innovation, and allay concerns in business and wider society that executive pay needs to be reassociated with business and social realities,” he added. “The hope is to stimulate not just debate but change.”
The report follows prime minister Theresa May’s announcement at the annual CBI conference that the government will no longer force companies to have workers on their boards, instead suggesting a more voluntary system.
