This report examines progress on the Government’s attempts to address the gap that it acknowledges between the pay of chief executives on the one hand and company performance and employee pay on the other. It is part of our scrutiny of corporate governance and follows our report on gender pay gap reporting in 2018.
We find that the “say on pay” reforms introduced in 2014 have had some impact in curbing levels of new pay awards, which have remained fairly flat over the last decade. However, there continue to be regular examples of excessive payments, which are reputationally damaging and serve to fuel a perception of institutional unfairness that, if not addressed, is liable to foment hostility and undermine social cohesion and support for the current economic model.
Over the last decade chief executives’ earnings in the FTSE 100 have increased four times as much as national average earnings. FTSE 100 chief executives earn around £4 million per annum while average pay is under £30,000. These huge differentials have been baked into the pay system, in part by a heavy reliance on over-generous, incentive-based pay and partly by the weakness of remuneration committees which design ever more complicated and opaque pay packages for their peers. The acceptance of a £75 million payment by the chief executive of Persimmon, based more on a Government initiative to encourage house-ownership rather than his own performance, was only the most egregious of a number of shaming decisions.
We conclude that the structure of executive pay has become too dominated by incentive-based elements that do not effectively drive decision making in the long-term interests of the company. Whilst welcoming evidence of a shift to extended terms for Long -Term Incentive Plans (LTIPs) we advocate a simpler structure based on fixed term salary plus deferred shares, vesting over a long period, and a much- reduced element of variable pay, which should be more aligned to the wider social responsibilities of companies. We also argue for a much stronger link between executive and employee pay, for example by the greater use of profit-sharing schemes. We recommend an employee representative on the remuneration committee to strengthen this link.
We welcome the proposed replacement of the underpowered and passive Financial Reporting Council and recommend that the new regulator is given the tools and encouragement to be tough on those companies that behave unreasonably on executive pay and fail to adhere to the tighter requirements of the revised UK Corporate Governance Code on higher quality pay reporting. We welcome the introduction of pay ratio reporting but call for it to be applied much more broadly.
A tougher, more proactive regulator is needed because we do not have confidence in remuneration committees, or institutional investors in exercising their stewardship functions, in a way that consistently bears down on executive pay. We believe that the primary responsibility for changing the environment on executive pay rests with asset owners–the pension funds that invest our money for the long-term. We call for greater transparency in the way they set investment objectives, including on executive pay, and that the regulator is given powers to take effective action against those who do not meet their responsibilities under a revised Stewardship Code.
Greater transparency, accountability and responsibility are required throughout the investment chain if the gap between pay at the top and the bottom is to be reduced and companies are compelled to pay their whole workforce reasonably and responsibly.
Published: 26 March 2019