5Conclusion
62.In times of stagnant or minimal pay growth for the ordinary worker in particular, business leaders have a responsibility to avoid the eye-watering and unjustified executive pay awards that have recently too often embarrassed companies and damaged the reputation of British business. The stakes could scarcely be higher: the UK’s model of capitalism could quite conceivably be undone by ill-disguised corporate excess and naked greed. The UK should leverage its reputation as a leader on corporate governance and great place to do business to drive reform of executive pay practice of multi-national businesses.
63.A closer link between executive pay and that of employees is in the interests of both and will serve to increase trust in business more generally. The publication of pay ratios from 2020 will help this process but needs to be extended further. There is little point in Ministers regretting levels of inequality if they are not prepared to exert any influence in reducing it. We agree that it is not for Government to intervene directly to determine pay, but it can send strong signals on pay reform and give the regulator the powers and remit to ensure the highest standards of engagement with shareholders and with other stakeholders, particularly employees.183 This will not be enough though. Investors have the powers but neither the will nor incentives to exert downward pressure on executive pay. Better stewardship alone cannot be expected to achieve acceptable outcomes. Asset owners need to be more responsible, and more accountable, for the way in which our investments are deployed. A requirement for there to be employees on remuneration committees should help ensure that disastrous decisions not to cap bonuses made by the likes of Persimmon do not happen again.
64.More prescriptive guidance should encourage a further move away from short termism in pay policies. We have set out our case for a simpler, more transparent structure based primarily on basic salary and long-term incentives. Bonuses should, in principle, be shared more evenly throughout the workforce and should recognise wider goals of companies than financial performance, such as environmental and social factors. Whatever structure is adopted, there should be a stronger emphasis on clear explanation to shareholders and the public on the justification for pay structure and any increases in executive pay.
65.Ideally, all companies should be able to show sensitivity to the society in which they are able to flourish by keeping pay reasonable. The 2014 reforms have had some positive impact, and post-2016 measures will take us slightly further; but we are far from there yet. Consequently, we believe that the climate for excessive executive pay needs to be made sufficiently hostile and damaging to reputations that no-one in the decision-making chain would be prepared to countenance it. Our recommendations are aimed at this objective and we urge the Government and the regulators to support them.
Published: 26 March 2019