Executive Rewards: paying for success Contents

2Recent developments

Trends in executive pay levels

4.Executive pay is complex, and there are a variety of ways in which trends in pay levels can be measured and represented. The membership of the FTSE is also changing, so the target being measured is moving. Taken as a whole, the weight of evidence suggests that awards made to FTSE 100 chief executives have remained largely unchanged since the financial crisis of 2008–095 but all too frequent abuses persist. This stability followed a steady rise in the pay of FTSE 100 chief executives from an average around £1 million twenty years ago to around £4 million today.

Figure 1: trends in levels and structure of pay

Source: Minerva Analytics

An increase in average pay in 2017 on the previous year was caused by a few substantial pay-outs under incentive schemes agreed before 2014, such as at Persimmon, and also changes in FTSE 100 membership.6 Figure 1 indicates that whilst base salaries have stayed fairly flat, other elements of pay packages, notably Long-Term Incentive Plans (LTIPs), have gradually been increasing as a proportion of the overall figure. This chart shows pay awarded. It includes an “expected value” for annual bonuses and for LTIPs awarded by remuneration committees at the start of the reporting period and which vest in future years. It does not show realised pay—the sums eventually paid out, as represented in the Single Total Figure (STF) for remuneration.7 This STF has been rising over the last decade. Figure 2 indicates that target remuneration (pay awarded) has increased by only 9% since 2009, but realised pay (the Single Total Figure) for median remuneration has increased by 66% over this period, as indicated by Figure 3.8 The corresponding increase in average weekly earnings is only 17%.9 The widening of the gap over this period is clear. This increase in realised pay for executives is primarily due to performance-related elements delivering more than originally estimated, an issue with the structure of pay we discuss further in Chapter 3.

Figure 2: target remuneration in FTSE 100

Source: FIT Remuneration Consultants

Figure 3: actual remuneration in FTSE100

Source: FIT Remuneration Consultants

5.One purported explanation for these persistently high levels of executive pay is that in an open and globalised economy ever-larger multinational companies have to offer generous pay to attract the best of a limited talent pool. The UK certainly pays well. In European terms, only in Switzerland are chief executive officers (CEOs) paid more than in the UK. All European countries pay less than in the US,10 where the structure of pay is much more heavily weighted in favour of long-term share-based incentive plans than basic salary.11 Within Europe, pay structure also differs, with greater emphasis being placed on pensions in other European countries than in the UK. Here, the pensions element has been steadily decreasing and pay has become more incentive driven, as we discuss in Chapter 3.12 These differences are largely historic and cultural, rather than indications of a thriving international competitive market for limited talent.13 In most countries, under 20% of top CEOs are foreign nationals; the figure is 40% in the UK for the FTSE100, reflecting the fact that many of these companies are multinational and choose to be listed here.14 Only 1% of CEOs are poached from rival firms; promotion from within is far more common.15 There is little evidence of a cut-throat international transfer market in top jobs driving up pay.16 The root causes of high executive pay, whilst not immune from global economic forces, are to be found, and fixed, at home.

Figure 4: executive pay and average earnings

Source: FIT Remuneration Consultants

6.Another explanation for high executive pay is that large increases for UK chief executives have flowed from the growth of companies and their success in increasing value to shareholders. Figure 4 shows that total shareholder return has increased in reasonably close step with executive pay in the FTSE100 between 2009 and 2018. Total market capitalisation (or shareholder value) for the FTSE 100 has increased from £3.4 billion to £9 billion in the same period.17 Given that executive pay is generally linked to an extent to company success, as demonstrated by increased returns to shareholders, it is to be expected that executive pay will be pulled upwards in times of economic growth and good company profitability. But the spoils of this economic success have not been fairly shared. Executive pay increases have comfortably outstripped those in average earnings. The Minister for Small Business, Consumers and Corporate Responsibility, Kelly Tolhurst MP, told us that “inequality levels are of course a concern” and that in some instances, executive pay “is too high”.18

Excessive pay

7.Ministers have not specified those instances in which pay has been too high. But since the Prime Minister’s comments on corporate excess in 2016 the media has regularly reported on large awards and shareholder revolts. A sample is listed below.

Persimmon: Three executives were paid a combined total of £104 million in 2017, including £47 million for Chief Executive, Jeff Fairburn, an increase from £2.1 million the previous year.19 His total payment under an LTIP agreed by shareholders in 2012 was initially worth £100 million in shares, a sum he agreed to reduce to £75m after shareholders objected.20 Performance targets included in the LTIP were hit much earlier than expected owing to the company benefiting from a huge volume of new builds resulting directly from the Government’s taxpayer-supported help-to-buy scheme. In December 2017, the company’s chairman and chair of the remuneration committee resigned over the scheme, acknowledging that it was poorly designed and should have included a cap. Jeff Fairburn was forced to resign in November 2018, because his remuneration had been a distraction and that it continued to have “a negative impact on the reputation of the business and consequently on Jeff’s ability to continue in his role.”21

Unilever: in May 2018, there was a significant shareholder revolt against (36% objecting) the proposed pay policy after the CEO, Paul Polman saw his pay (single total figure) increase by 51% from £6.75 million to £10.18 million between 2016 and 2017.22 The proposed new pay policy included increased potential compensation for the CEO, from £9.6 million to £11.2 million.

Royal Mail: in 2018 the new Chief Executive of Royal Mail Group, Rico Back, was paid a £5.8 million “golden hello” to buy him out of his previous contract as CEO of General Logistics Systems (GLS), also a part of the Royal Mail group. His new basic salary was to be 17% higher than that of his predecessor, Moya Greene, who herself received a pay-out of around £915,000 upon her departure.23 There was a 70% vote against the remuneration policy at the AGM. The Chair of the remuneration committee, Orna Ni-Chionna, told us that they must have been “listening to the wrong shareholders” when engaging and that she was “embarrassed that we got this engagement with shareholders so wrong.”24

BT: in July 2018 there was a significant shareholder vote against the pay report (34%) following the publication of the Chief Executive, Gavin Patterson’s 2017 pay package, only weeks after he had unveiled a new strategy that included 13,000 job losses. His pay included a performance bonus of £1.3 million. His final pay package of £2.3 million, before he stood down, represented a £1 million rise on the previous year.25

Melrose: the four top executives at the company that took over GKN were each paid over £40 million in 2017, as a result of their LTIP paying out. A shareholder revolt against the Directors’ Remuneration Report of 22% was not sufficient to defeat it.26

Foxtons: profits dropped by 64% and dividends collapsed but the chief executive was awarded a £218,000 bonus in 2017 for achieving “personal and strategic objectives”.27

8.Whilst these examples indicate a degree of shareholder discomfort, this has not prevented them from being made. Payments of this magnitude seem incomprehensible to the public and a very long way removed from ordinary people’s experiences of recruitment, reward and responsibility. It is why witnesses described that perceptions of excessive pay are “pervasive” and that the problem is “systemic and endemic.”28 The average pay of FTSE 100 chief executives is well over one hundred times UK average earnings of around £29,600. In many cases, the sums being paid to CEOs were so large that they could have instead financed significant investment in the business or provided meaningful rewards for employees if shared more evenly.

9.Executive pay is cited in surveys as one of the biggest threats to the reputation of business in the UK.29 One shareholder representative argued that “big disparities in how a company manages its workforce can undermine a sense of solidarity in the company, and ultimately productivity and success”.30 Huge pay awards, and pay inequality in general, can only contribute to disengagement by employees.31 The way in which long-term awards pay out mean that too often, there is no perceivable link between corporate financial performance and the sums paid out to CEOs. There is academic evidence to suggest that this link is in any case statistically weak or non-existent32 and also some evidence to indicate that pay inequality is negatively correlated with productivity.33 This debate will continue, but the public perception will remain whilst these bad examples appear with depressing regularity.

10.Even after a decade of relative stability, executive pay levels amongst UK listed companies remain at a level that appears disproportionate. Many of our witnesses concurred that there is evidence that the reforms implemented in 2014 have had some impact in curbing new, excessive pay increases in listed companies.34 That said, there have still been decisions made since 2014 that are clearly not reasonable and have resulted in considerable reputational damage. Taken as a whole, since 2014 companies have continued to share the rewards of their success largely with their shareholders, in the form of dividends, and with the senior management in the form of multi-million pound pay packages, rather than sharing the proceeds more evenly amongst their workforce, who sustain the business, through pay and pension contributions. Huge differentials in pay between those at the top and bottom remain the norm. Executive greed, fed by a heavy reliance on incentive pay, has been baked in to the remuneration system. With that comes a public perception of institutional unfairness that, if not addressed, is liable to foment hostility, accentuate a sense of injustice and undermine social cohesion and support for the current economic model.

Effectiveness of recent reforms

Review of the Financial Reporting Council

11.Excessive executive pay can be seen as a symptom of a weak board or management within the company—in other words, of poor corporate governance. Overall responsibility for operating the UK’s system of corporate governance rests with the Financial Reporting Council (FRC). Following repeated criticisms of the performance of the FRC, notably from this Committee in our joint report on the collapse of Carillion,35 the Government launched an independent root and branch review of the FRC in April 2018, led by Sir John Kingman. It looked at the role, governance and powers of the FRC and published its report on 18 December 2018. The report was highly critical of the FRC and recommended its replacement with a new body, the Audit, Reporting and Governance Authority (ARGA).36 We will report in more detail on the Kingman Review and regulation in the context of our inquiry into the future of audit.37 However, in the light of our findings in relation to Carillion, we are fully supportive of the case for a more empowered, aggressive and proactive regulator that has the ability to take decisive action, where necessary, on executive pay and its reporting. We look forward to the establishment of the new regulator as soon as possible. Many of our recommendations are directed at the new regulator that we expect to be established in place of the FRC.

Revised Corporate Governance Code on remuneration

12.The Financial Reporting Council published its new Corporate Governance Code in July 2018, following extensive consultation. At present, there is little meaningful reporting on broader workforce issues and employment practices in companies’ annual reports.38 The previous BEIS Committee called for listed companies to include in them clear explanations of their people policy, including the rationale for the employment model used, and their overall approach to investing in and rewarding employees at all levels of the company.39 The revised FRC Code does not quite go that far, instead stating that the Board “should include an explanation of the company’s approach to investing in and rewarding its workforce” and, specifically, of the link between individual awards and “the delivery of the strategy and long-term performance”.40 It also states that companies should ensure that “reputational and other risks from excessive rewards—and behavioural risks that can arise from target-based incentive plans—are identified and mitigated.”41

13.More comprehensive and meaningful reporting on pay is long overdue. An analysis by the High Pay Centre found that in 2017 only 18% of FTSE100 companies included information about staff turnover in annual reports, only 7% of FTSE 100 report on the use of agency workers and less than 10% report on use of agency workers and staff sickness rates.42 PwC agree, saying that “few companies seek to provide insight by going significantly beyond minimum regulatory requirements.”43 Others noted that the personal performance targets of CEOs were seldom articulated and, when they are, there is scope for improvement in the disclosure of performance against them.44

14.The new wording on the reputational risks of excessive reward is apposite but may not be enough to win an argument in the boardroom, given recent history. We believe that the Code should be much more prescriptive in articulating basic principles of fairness and in identifying acceptable and unacceptable practices, for example, on the use of “golden hellos”, limiting pay-outs, withholding and clawing back awards, all of which have featured in recent pay scandals. For example, at Persimmon it was the absence of adequate provisions in contracts for the capping of pay-outs and for withholding or clawing back payments meant that the huge awards due could not legally be stopped.45 Our joint report on Carillion called for consideration of minimum standards for bonus clawbacks but has not yet been taken forward.46 The new Corporate Governance Code does set out that provisions for use of discretion and for withholding/clawing back pay should be included, but no detail has been agreed on the circumstances in which these provisions should be applied. Investors agreed that some form of standardised wording would be very helpful.47

15.Similarly, the revised Code provides high level guidance on the principles for setting pay, but no indication on what might be considered “excessive”, nor on appropriate structures and bonus objectives. The Code continues to operate on a “comply or explain” basis, so there are no explicit sanctions available to the FRC. Instead, the regulator engages in a dialogue with companies to improve reporting, where necessary. The new Code provides some more detail on remuneration than its predecessor, with stronger wording on the need for policy to be aligned with company purpose and values and be linked to the company’s long-term strategy. We welcome the revised Corporate Governance Code’s improvements on remuneration guidance, such as the requirements to consider the long-term remuneration across the whole workforce and potential reputational risks. But the Code alone is unlikely to be an effective driver of change. We recommend that the new regulator clarifies and strengthens its guidance on executive remuneration with a view to exerting significant downward pressure, avoiding unjustifiable payments and ensuring that, if they are made, they can be readily recovered.

New reporting requirements on remuneration

16.Following a recommendation from our predecessor Committee, the Government introduced legislation48 in 2018 which requires companies to provide more detailed narrative reports of how they have fulfilled their requirements under section 172 of the Companies Act 2006 to promote the success of their company for the benefit of the members as a whole, but having regard to a wide range of stakeholders, including employees and suppliers.49 The legislation applies to reports on periods beginning from January 2019. This represents a welcome attempt to move away from the formulaic “tick box” type of reporting to a more narrative approach that requires companies to be more publicly accountable for their actions, including on pay.50 More transparency and justification will be required on remuneration. Companies will have to specify the potential impact of a 50% increase in share price on executive pay awards, improving the visibility of outcomes for shareholders and reducing the risk of vast but “unforeseen” pay-outs.51 Any company awarding huge bonuses that prove damaging to reputation should have to explain how this can be consistent with their legal obligations to promote the success of the company while at the same time having regard to the interests of their employees, at the risk of legal challenge.52 Formulaic and legalistic wording will not do. We welcome the new reporting requirements but are not convinced that they alone will lead to greater alignment between remuneration and company objectives. We recommend that the new regulator monitors how remuneration reports and better reporting against section 172 of the Companies Act meet the aims of increased transparency and alignment of pay with objectives.

Engagement with employees on pay

17.The Government stepped back from the Prime Minister’s initial support for worker (and consumer) representation on boards.53 Instead, it floated three options in its Corporate Governance Green Paper,54 which subsequently were included in the FRC’s revised Corporate Governance Code. This requires listed companies to improve engagement with employees by adopting one or more of three ways, or to report on what alternative arrangements they have made:

The Code took effect from 1 January 2019, so it is too early to see how many companies adopt the more ambitious and, we would argue, more effective option of appointing an employee to the board.56 The previous Committee did not recommend mandating the appointment of workers on boards, in the light of a number of practical difficulties, but instead encouraged more companies to consider it, with a view to it becoming the norm eventually. A more prominent role for employees in company decision making is likely to have a restraining influence on executive pay. They may, for example, want to ensure that all staff are being paid the real living wage before signing off bonuses of tens of millions of pounds for senior executives.57 It is difficult to believe that some of the more egregious pay awards that we outline in paragraph 7 would have been readily agreed by a board including the challenge of an employee able to represent the concerns of the workforce. We recommend that the new regulator monitors companies’ compliance with the Corporate Governance Code with a view to making an assessment of which method of engagement proves most effective and recommending changes.

Employee representation on remuneration

18.If there is to be no mandatory employee representation on the board, the presence of an employee as an ex officio member of the remuneration committee would be a useful alternative. The FRC rejected the recommendation of the previous Committee that this option should be included in the revised Code. Instead, the Code states that the remuneration report should include explanations of:

19.Given the reluctance of the FRC to recommend employees on the board or the remuneration committee, it was not surprising to learn that companies have not yet done so.59 The TUC argued for a minimum of two elected workforce representatives to be included on remuneration committees and that these committees should consider how pay policy affects the entire workforce, not only those directly employed.60 The explanations on workforce engagement sought by the revised Code are an improvement, but they are not an adequate substitute for the permanent engagement achieved by remuneration committee membership. We recommend that companies should be required to appoint at least one employee representative to the remuneration committee to ensure that there is full discussion of the link between executive pay and that of the workforce as a whole.

Pay ratio reporting

20.The Government also accepted the recommendation from the previous Committee to introduce a statutory requirement for companies to publish pay ratios between executives and employees. The new Regulations will require quoted companies of over 250 employees to publish and explain the CEO’s total annual remuneration, as measured by the Single Total Figure, to be compared with the equivalent at the median and each quartile for UK employees across the group.61 Companies are required to keep statistics from January 2019 and to start to report them in 2020.

21.Witnesses generally welcomed the publication of pay ratios as a useful measure, up to a point.62 Pay ratios between CEOs and their employees are typically around 80:1 but can be much higher.63 Some expressed scepticism that a few words of explanation in a report after the event would have any impact on behaviour, noting that it will not allow meaningful comparisons across companies and sectors owing to the very different nature of organisational structures.64 Year-on-year comparisons will also be subject to large fluctuations of CEO pay because it comprises a substantial proportion of performance-related pay.65 A minority of witnesses argued for a legally binding maximum pay ratio: a range between 20:1 and 75:1 were suggested.66

22.We believe that pay ratio reporting should also include a requirement to publish a figure for the ratio between CEO and the lowest pay band, as well as the bottom quartile, to reinforce the link between pay at the top and the bottom. We also see no reason why the reporting requirements should be limited to the listed sector, rather than reflecting the reach of the gender pay gap reporting requirements, which apply to all organisations with more than 250 employees—over 10,000 employers.

23.We welcome the introduction of new requirements to publish pay ratios, which will allow meaningful comparisons to be made, at least within sectors, and require companies to explain when and why they have chosen to pay above reasonable expectations. Over time, we expect sector norms to develop, potentially with the active intervention of the regulator. By highlighting the link between executive and employee pay, the gap between them should, with public and peer pressure over time, reduce. To assist and broaden this objective, we recommend that pay ratio reporting requirements be expanded to include all employers with over 250 employees and that the lowest pay band be included alongside the quartile data required.

24.We were disappointed that the new requirements, like those relating to gender pay gap reporting,67 do not apply to partnerships, such as the UK’s main law firms and professional service providers. We note that since 2016 The Investment Association has been asking companies to voluntarily disclose pay ratios, and that only a few have done so.68 In this context, we welcome the undertaking given to us by all the Big Four professional service firms that they would publish their pay ratios, notwithstanding the complications arising from the partnership model.69 There is no reason why companies, including major legal partnerships, that can readily calculate these pay ratios should not report them first in their 2019 annual reports and we recommend that they do so. We further recommend that the new regulator takes to task any company or firm that fails to explain adequately how they have taken into account pay ratios when determining levels of remuneration, particularly when pay ratios significantly exceed sector norms.

Revised Stewardship Code

25.The Stewardship Code is published by the FRC and contains guidance, on a “comply or explain” basis, for investors and asset owners on how to discharge their stewardship functions in respect of the listed companies in which they invest. After some delay, the FRC issued for consultation a revised Stewardship Code in January 2019.70 This is the first update to the Code since 2012. The Code includes guidance for investors and asset managers on a range of issues, including pay, but, like the Corporate Governance Code, it is not mandatory and carries no sanctions. The Kingman Review of the FRC describes the Stewardship Code as “not effective in practice”.71 It argued that it should focus on outcomes and effectiveness, rather than “boilerplate” policy statements and that, if this cannot be achieved, “serious consideration should be given to its abolition”.72 We consider the effectiveness of the proposed revised Code in Chapter 4 on engagement.

Register of dissent

26.Following a request by the Government, The Investment Association established a public register73 in December 2017, listing All-Share companies that have received a vote of more than 20% of shareholders against a resolution at an annual general meeting (or other general meeting). The register includes an indication as to whether companies have responded to the opposition. The aim of the register is to expose those companies that do not respond to shareholder concerns and to promote better dialogue. Pay is the most frequent subject of dissent (42% of resolutions).74 As at December 2018, there were 151 companies and 294 individual resolutions on the register. There was a 67% increase in the number of FTSE 100 companies appearing on the register for pay-related resolutions from 2017 to 2018.75 The Investment Association maintains a list of all those companies which incur a vote against for the same resolution in consecutive years, and in December 2018 it wrote to all 32 of such companies suggesting that they respond better to investor views. There were 15 companies on this “repeat offenders” list in respect of remuneration reports in both 2017 and 2018.76

27.Whilst supported by most organisations, others argue that appearance on the register does no lasting reputational damage and is unlikely to be effective in changing behaviour.77 Some even argued that it could be counter-productive and could make companies less likely to pursue progressive, but risky reforms, for fear of appearing on the register.78 We believe that better engagement and explanations of changes should mitigate any potential damage of appearing on the register. We welcome the development of the Public Register by the Investment Association as it provides greater transparency for investors on how companies engage with their shareholders. It has demonstrated that remuneration remains a key source of discontent for shareholders. We agree that the focus should remain on those companies which ignore shareholder concerns on pay and recommend that the new regulator explores more effective sanctions than a letter from the Investment Association.

Corporate governance code for private companies

28.One of the limitations of imposing restraint on executive pay via the Corporate Governance Code is that it only applies to around 800 premium listed companies. Witnesses pointed out that hedge fund managers, and many in the sports and entertainment industries get lavishly rewarded without enduring the same degree of public scrutiny.79 The reason for that is that there is an obvious market for public figures and these individuals do bear the wider responsibilities that companies do. Also, behaviour in the publicly quoted sector sets the tone and benchmarks for other companies to follow. In this context and following a recommendation from our predecessor Committee, the Government appointed a business-led panel to develop a Governance Code for large private companies. The report of the Wates Review was published on 12 December 2018.80 Qualifying companies will have to start reporting in line with the new Principles from 2020. The new Principles apply to all companies that have more than 2,000 employees, a turnover of more than £200 million, and a balance sheet of more than £2 billion. Under the regulations, companies are not required to adopt the new Principles or any governance code but must explain if and why they have not done so in a statement of corporate governance arrangements.81

29.On remuneration, the guidance in the new Principles is in line with those of the Code for listed companies, suggesting that pay policies may include “robust consideration of the reputational and behavioural risks to the company that can result from inappropriate incentives and excessive rewards”. It is entirely permissive in tone: “Additional transparency could extend to commenting on how executive remuneration reflects general practice within the sector or voluntary disclosure of pay ratios.”82 Witnesses agreed that the new Principles are a welcome first step but could have been much stronger,83 particularly on reporting.84 Paul George, from the FRC, accepted the limitations of the regulatory rather than a fully legislative approach, and acknowledged that there is too much flexibility in the Code for it to be as effective as it might be.85 We welcome the publication of the corporate governance principles for private companies as a foundation upon which the new regulator should build robust and more enforceable guidance on pay and other matters. We recommend that the new regulator takes on responsibility for monitoring the impact of the Code and examines the case for greater disclosure around remuneration and for expanding its application more widely.

Share buy backs

30.The Government commissioned an independent review of the use of share buy backs in January 2018.86 This followed growing criticisms that companies, and chief executives in particular, were using carefully-timed share buy backs to artificially inflate the price of shares, so as to maximise the proceeds of bonuses delivered via shares.87 It is argued that such activity has a detrimental impact on investment and other, more productive or long-term expenditure.88 We understand that the review reported to Ministers some time in 2018, but no publication or announcement has yet been made.89 In response to our written request for an indication of progress, the Secretary of State told us that there would be an announcement “in due course”.90 We cannot understand why the Secretary of State would want to block the publication of an independent study and recommend that the review of share buy backs is published without further delay. We further recommend that remuneration reports include analysis of the impact on executive remuneration of any share buy backs during the reporting period.

5 See Box after paragraph 44 for summary of 2014 reforms. Q519 [Gosling] [Hildyard], Q236 [Chapman], Q365 [Wilson]

6 See paragraph 7; Q230 [Cotton]

7 The analysts Minerva Analytics Ltd (CGP0042) explain that this STF can underestimate the amount paid out by long-term schemes, if executives choose not to cash in share options initially and they subsequently rise in value.

8 The year 2009 is used because it is the first year that the Single Total Figure was published and so can be compared on a consistent basis.

9 FIT Remuneration Consultants and ONS Annual Survey of Hours and Earnings.

10 UK executive pay is 30%-40% lower in the UK than in the US, we were told by Clare Chapman Q236

13 Q524 [MacDougall], Minerva Analytics Ltd (CGP0042)

14 Q524 [Gosling]

15 Q524 [Hildyard]

16 Q529 [MacDougall]

17 Figures from FIT Remuneration Consultants

20 Aberdeen Standard Investments (CGP0039); The 2018 Annual Report showed Jeff Fairburn’s total pay in 2017 and 2018 to be £84.7 million.

22 Financial Times, Unilever faces potential shareholder unrest over pay policy, 13 April 2018; Unilever Annual Report 2017

23 Royal Mail Annual Report 2017 and correspondence between Chair of Committee and Chair of the Remuneration Committee, July 2018

25 BT Annual Report 2017; The Guardian, BT hit by shareholder revolt over outgoing chief’s £2.3m pay, 11 July 2018

28 ICAEW (CGP0033)

29 See Institute of Directors survey, in High Pay Centre report, Performance-related pay - what does business think?, March 2015; in the Edelman 2019 survey, 62% of employees cite high pay and bonuses of senior management as an important issue to address.

30 Q561 [Howarth]

31 Q273 [Cotton] A CIPD survey in 2015 found that six out of ten employees were discouraged by high levels of CEO pay and felt it was bad for a company’s reputation (cited in Deborah Hargreaves, Are Chief Executive overpaid?)

32 See, for example, Lancaster Business School, An analysis of CEO pay arrangements and value creation for FSTE 350 companies, 2016

33 IPPR, Prosperity and Justice, A plan for the new economy, September 2018; see, for example Harvard Business School, Ethan Rouen, Rethinking Measurement of Pay Disparity and its relation to firm performance, 2017

34 Qq617–618 [de Lima], Q555 [Williamson] [George]

35 BEIS and Work and Pensions Committees, Second joint report of Session 2017–19, Carillion, HC 769

36 Independent Review of the FRC (Kingman Review), December 2018

37 BEIS Committee website, inquiry into The future of audit

38 Q584 [Howarth], Q588 [Williamson]

39 Fourth Report of Session 2016–17, HC 702, para 112.

40 FRC, Corporate Governance Code, paras 2 and 40.

41 FRC, Corporate Governance Code, para 40.

42 High Pay Centre (CGP0038)

43 PwC (CGP0026)

44 Hermes Equity Ownership Services (CGP0031)

45 Qq360–363 [Sears and Chapman]

46 BEIS and W&P Committees, Second Joint report of 2017–19, Carillion, HC 769; see The Investment Association (CGP0029)

47 Q394 [Stirling]

50 Q376 [Wilson], Q556 [George]

51 See para 7 on Persimmon.

52 See Q383 [Stirling]

53 Rt Hon Theresa May MP, speech, 11 July 2016

54 BEIS, Corporate Governance Green Paper, November 2018

55 FRC, UK Corporate Governance Code, para 5.

56 We heard that Mears Group has appointed an employee to the board as an (non-executive) “Employee Director”.

57 For example, in December 2017, it was reported that 450 workers at Persimmon received less than the real living wage of £8.75 an hour or £10.20 an hour in London.

59 Q357 [Cotton], CIPD (CGP0030)

60 TUC (CGP0037)

62 Q596 [Williamson], Q599 [George] Q601 [Howarth]

63 Mr Michael Nisbet (CGP0043); Higher figures, for example quoted by the High Pay Centre, can be obtained using mean rather than median pay rates: eg 145:1. Median rates are generally considered to be the more meaningful figure. See CIPD/HPC report, Executive pay: review of FTSE 100 executive pay, August 2018.

64 Institute of Directors (CGP0035)

65 Q444. For example, Persimmon told us in a letter of 3 July 2018 that because of the vesting arrangements of the 2012 LTIP the pay ratio rose from 62:1 in 2016 to 1,320:1 in 2017.

66 The High Pay centre suggested 40:1, the Association of Accounting Technicians 20:1. John Lewis example of 75:1 was also cited by Association of Accounting Technicians (AAT) (CGP0016)

67 Thirteenth Report of Session 2017–19, Gender pay gap reporting, HC 928, para 43.

68 The Investment Association (CGP0029)

69 Qq 490-1, oral evidence from KPMG, Deloitte, EY and PwC on the Future of audit, 30 January 2019.

71 Independent Review of the FRC (Kingman Review), December 2018, para 12.

72 Independent Review of the FRC (Kingman Review), December 2018, page 11.

73 The Investment Association, Public Register

74 Figures from The Investment Association, updated from (CGP0029)

75 Figures from The Investment Association.

76 The Investment Association, Repeat Offenders List, December 2018. The full list is: Astrazeneca, Centamin, Clarkson, Entertainment One Ltd, GC Holdings, Inmarsat, Playtech, Premier Oil, Raven Property Group Ltd, Rotork, Safestore Holdings, Sophos Group, Tarsus Group, Telecom Plus and WPP.

77 CIPD (CGP0030), Hermes Investment Management (CGP0045), Association of Accounting Technicians (AAT) (CGP0016), Big Innovation Centre, The Purposeful Company (CGP0024)

78 PwC (CGP0026)

79 ICSA: The Governance Institute (CGP0034), Letter from Clare Chapman, 15 June 2018

83 Q574 [Howarth]

84 Q574Q574 [Williamson]

85 Under the Corporate Reporting (Miscellaneous Provisions) Regulations 2017 large private companies are merely required to explain their corporate governance arrangements, including whether they follow a code. There is no prescription.

86 Share buy backs describes the practice of companies buying back shares from the market, potentially in order to inflate the share price in the short term.

87 See, for example, Financial Times, Record share buy backs should be raising alarms, 7 November 2018

88 IPPR, Commission on Economic Justice and Prosperity, 2018, citing Lazonick W (2014) ‘Profits without prosperity’, Harvard Business Review, September 2014

89 ICAEW (CGP0033)

90 BEIS Committee website, letter from Secretary of State, 28 February 2019

Published: 26 March 2019