Reflections on the latest High Pay Centre event, in which the views of a diverse range of speakers were presented to an audience on London University business students
The High Pay Centre’s latest event brought together speakers from all sides of the executive pay debate: Oliver Parry from the Institute of Directors (IoD), remuneration consultants Duncan Brown and Cliff Weight, Paul Nowak, Assistant General Secretary of the TUC and Anita Skipper, independent governance consultant, as well as a student representative who spoke forcefully about the need for action to increase the gender diversity of company boards.
Inevitably each speaker had a different perspective on the topic, but despite this two key themes emerged from the debate.
The first of these was a general view that there is something wrong with the current executive pay landscape in the UK. While no-one could have expected the TUC to be supportive of executive pay levels, Nowak spoke persuasively about the damaging impact of excessive pay levels on public trust in business, and about the adverse social and economic consequences of the widening gap between the highest- and lowest-paid. Even the IoD believes that the median level of executive pay has ratcheted up to an unacceptably high level, with Parry referring to the ‘cosy club’ of executive pay-setting.
Speaking from a shareholders’ perspective, Skipper speculated that shareholders are asking executives to do the wrong things within the wrong timescales. She felt that executive pay may have become too strongly linked to financial performance, and said that executives should be rewarded for ‘doing good’ as well as for doing well. In other words, performance measures should reflect the achievement of strategic non-financial goals such as improving the health and safety record of the workplace or paying all employees a living wage, as well as financial measures of business success.
Striking a more positive note, Brown felt that the increased transparency in executive pay brought in by the government’s 2013 regulations on pay reporting was having a bigger impact than had been expected. He noted that executive salary increases were no longer outstripping salary increases for other staff, and expected increasing pressure on variable pay in the 2015 annual reporting round. However even he was sanguine about the scope for turning the clock back to the days when executive pay was both simpler and more modest.
Shareholders not holding companies to account
The second principal theme was the role of the various stakeholders in setting executive pay. While Parry, on behalf of the IoD, welcomed both the work of the High Pay Centre and the government’s pay reporting regulations, he said that decisions on pay are a matter for companies and their shareholders alone, and that any government or regulatory input should be limited to a facilitating role. Skipper acknowledged that shareholders have a poor record of holding companies to account. Shareholders have diverse interests and perceptions of what constitutes success, and rarely converge on a common view in sufficient numbers to challenge corporate policy makers. The fact that each of the several shareholder voting agencies (the bodies that advise shareholders on how they should vote at corporate AGMs) has its own set of guidelines or principles on executive pay tends to reinforce this picture.
Nowak argued for employee representation on remuneration committees, brushing aside concerns by noting that fourteen other European countries already have some form of employee representation at board level. The UK already has a similar form of representation on trustee boards for pension plans, where at least one-third of trustees must be member-nominated. Meanwhile Brown and Weight both highlighted the difficult job performed by remuneration committee members, who must often face tough choices over whether to react to market pressure on pay, for example a bid from a competitor, or risk losing a key member of the leadership team.
Where to from here?
Vince Cable is due to publish the government’s review of the new reporting regime in the next few weeks, and it seems likely that he will call on companies to specify the maximum level salary increase executives could receive within the scope of the remuneration policy. In fact the regulations already require companies to do so, but in practice companies have largely ignored this. Shareholder advisory groups have already said that they want to see greater transparency in the reporting of performance targets for short- and long-term incentives – corporate governance forum the GC100 and Investor Group believes disclosure of performance targets has actually declined under the new reporting regime, as many companies have chosen to use the confidentiality get-out clause in the regulations.
Will Cable revisit the question of publishing the ratio between the chief executive’s pay and the median or lowest-paid employee? A recent e-Reward report concluded that the current reporting regulations do little to encourage transparency in this area. While companies must present chief executive total pay alongside that of a representative group of employees, the flexibility that companies have in selecting the representative group means that comparisons between companies are meaningless. E-Reward concluded that the publication of a ratio would be the most effective way to provide shareholders with a meaningful benchmark, although it acknowledged that ratios are not without their drawbacks. Other groups including the High Pay Centre have also called for the publication of a ratio, such as is already a requirement for public sector bodies. Nonetheless there is no indication that the government will bring ratios back to the table in the short term.
The government firmly rejected employee representation on boards as part of the wide-ranging review that brought about the new pay reporting regime, so it seems unlikely that this will be revisited unless there is a change in government. And yet there are clear flaws in the current reliance on pay transparency and shareholder accountability, as the High Pay Centre event highlighted. A perhaps surprising omission in the debate is how well equipped remuneration committee members are to carry forward any meaningful shift in the executive pay landscape. In the wake of the pension scandal that emerged following the death of Robert Maxwell in the early nineties, significant structural reforms were introduced in pension scheme governance. Pension plan trustees now benefit from a whole infrastructure of support and accountability, with clearly articulated responsibilities that are overseen by a regulator, and excellent independent training on the technical and procedural complexities that their role entails. Perhaps some of this infrastructure should be replicated for the non-executive directors who make up the UK’s remuneration committees, aimed at providing them with the knowledge and the wherewithal to challenge remuneration consultants and corporate executives effectively, and strike a better balance between the interests of the individual, the company and more generally, of society.