Remuneration committees should be obliged to enforce an absolute cap on total pay for executives in any year, according to a report by the Commons' Business, Energy and Industrial Strategy Committee.
The Executive rewards: paying for success report also recommended that companies should have at least one employee representative on their remuneration committees, and that they should make greater use of profit-sharing schemes to ensure staff as well as bosses reap the benefits of strong financial performance.
The report highlighted that over the past decade the pay of the average FTSE 100 CEO has risen four times as fast as that of their employees to reach £4 million. This compares with an average UK salary of £29,600.
It highlighted a number of recent ‘shaming’ pay decisions including a £75 million bonus in 2017 for former head of Persimmon Jeff Fairbarn, who subsequently stepped down amid criticism that the housebuilder’s strong performance was fuelled by the taxpayer-funded help-to-buy scheme. Another example was Royal Mail, where 70% of shareholders voted against a £5.8 million ‘golden hello’ for new boss Rico Back last year.
Such ‘huge differentials’ have become endemic, the report said, partly because of over-generous incentive-based pay packages. It also blamed firms' own remuneration committees for approving 'ever-more complicated and opaque pay packages'.
To tackle this the report recommended that long-term incentive plans (LTIPs), which hand bonus shares to executives, should be adjusted so that awards are paid out over longer periods. The variable element of pay should also be curtailed to prevent excessive payouts, the report stated. It also recommended a new financial regulator to monitor pay schemes.
Stephen Perkins, senior research fellow at the Global Policy Institute, told HR magazine that it was “hard to subdue a ‘told-you-so’ reaction”, given the amount of research that’s existed for some time around the damaging effects of – and how best to curtail – excessive executive pay.
Citing an article he co-authored for the Journal of Management Studies in 2005, that “opened [by] saying that in spite of a decade of structural changes to corporate governance arrangements top pay continued to attract controversy”, he said it was “bizarre to think that, almost a decade-and-a-half on, we see publication of a report still having to call out ‘disastrous decisions’ in this area”.
Responding to the recommendation to appoint employee reps to remuneration committees, he added that it was also hard “not to sense an echo in the report of a recommendation to get a more diverse body of people into positions of influence over executive reward, [he] submitted with another colleague in response to the government’s 2016 green paper consultation.”
“[In this we] also sketched out a more effective way of setting standards so as to assure, as the report puts it, ‘greater certainty’ and thus more realistic pay levels – ones that the average citizen can feel pass a ’social justice’ test when transparently explained looking at the ratios,” he said.
Perkins said that it’s crucial to finally start taking this issue, and this most recent report’s recommendations, seriously. “Its recommendations make sober reading and should be received in that spirit if at least some are to make it into practical application,” he said, adding that the critical question now is: “who will judge the criteria for success and how it is applied?”
Charles Cotton, senior reward and performance adviser for the CIPD, agreed that “it’s high time that high pay is tackled". “Organisations need to review the best way of rewarding their senior people. They must question whether executive long-term incentive plans are delivering quality and sustainable outcomes for businesses or just driving short-term profits that benefit the few,” he said.
He added: “There needs to be a much stronger link between corporate performance and the remuneration of all workers, including those at the top. We want to see a new broader definition of corporate success that goes beyond profit and loss and also looks at how people are managed, rewarded and developed and how customers are treated. To support this we welcome the idea of the employee perspective being part of the pay governance process as part of broader reform of remuneration committees.”
But Roger Barker, head of corporate governance at the Institute of Directors, sounded a note of caution around worker representation on RemCos. “Would they share the fiduciary duties of other directors?” he asked. “Would they be in a position to integrate discussion of remuneration issues with the overall strategy of the company?
“Although superficially attractive, we doubt that such a measure would be a positive step forward for UK corporate governance.”
Steven Young, professor of accounting at Lancaster University Management School, added the warning that it's important to have a nuanced debate around executive pay, to avoid fixating on quantum at the expense of exploring what mechanisms best stimulate value creation.
He explained that in fact it's been a move towards performance-based pay that has increased pay levels of execs relative to workers over the past few decades. "A natural consequence of the regulatory push toward greater pay-equals-performance sensitivity is an increase in executive pay (relative to average employee pay) because executives are bearing relatively more compensation risk," he told HR magazine, adding: "A key conclusion from the pay trend observed over the last two decades is that regulators and governance proponents need to be careful what they wish for."
He added: "Ultimately, the primary issue for executive pay is ensuring that senior management face appropriate incentives to take decisions that increase long-run shareholder value (which in turn benefits a broader set of stakeholders including employees and society more generally). Linking executive pay to performance is central to delivering such outcomes.
"The key issue in such a system is how performance is measured and whether the performance targets executives face are appropriate. This more nuanced view of executive pay requires the debate to shift from a focus on pay levels (and fairness concerns) to an informed discussion of pay structures and performance measurement."
Since January all listed companies with more than 250 employees must disclose the difference between their chief executive's pay and that of an average worker.
The Business, Energy and Industrial Strategy select committee's chair, Labour MP Rachel Reeves commented that examples such as Persimmon and Royal Mail "highlight the persistence of executive pay policies where far too little weight is given to delivering genuine long-term value, investing in the future, or ensuring rewards are shared with workers.
"When the company does well it is workers and not just the chief executive who should share the profits. Why should chief executives have a more generous pension scheme than those who work for them?" she said.