BHP Billiton, BP, Morrisons, Sage Group and Tui have been held up as examples of employers that are not fully complying with regulations governing the reporting of executive pay.
The High Pay Centre and partner organisations, including Pensions and Investment Research Consultants, Trade Union Share Owners, ShareAction and the Friends Provident Foundation, have written to the Financial Reporting and Review Panel (FRRP) over these concerns.
The regulations highlighted in the letter are the reforms proposed by the Department for Business, Innovation and Skills, which came into force on 1 October 2013.
The main changes to the executive pay reporting regulations included:
- A pay policy that will be subject to the new legally binding vote. All payments, including exit payments, must be covered by the policy.
- An illustration of the level of awards that could pay out for various levels of performance, meaning pay information is presented in a more understandable format.
- All elements of directors’ pay will be reported in a single, cumulative figure. The regulations define how this should be calculated so that all companies are consistent in their approach.
- Improved disclosure on the performance conditions used to assess variable pay of directors.
Analysis of annual reports
The group has analysed individual annual reports, which suggest that many employers claim that pay across the workforce is a consideration when setting executive pay, but provide little supporting evidence of how the employee’s perspective is taken into account.
Examples of statements that, in the group’s view, do not fully demonstrate how pay and conditions for employees were considered in relation to executive pay include:
- BHP Billiton – ‘Reviews consider general economic conditions and salary reviews across the rest of the group.’
- BP – ‘The committee also considered the level of pay increases for executives below board level, as well as different employee groups across the business.’
- Morrisons – ‘In determining remuneration policy, the remuneration committee is mindful of… the approach to pay and conditions taken within the group.’
The letter also identified two employers that it believes have exploited the clause in the regulations that state: ‘Where a comparator group comprising the employees taken as a whole is considered by the company as an inappropriate comparator group of employees, the company may use such other comparator group of employees as the company identifies, provided the report contains a statement setting out why that group was chosen.’
Sage Group compared the change in executive pay with pay for 1,200 UK managers, less than 10% of its total employees, while Tui chose a comparator group of 94 managers, less than 0.2% of its 55,000 employees.
Pay for employees and executives
The letter stated: “We believe it is essential that the FRRP takes strong action to ensure that these regulations are effective in protecting the interests of investors and the UK economy by ensuring that top executives are not disproportionately rewarded for their work in comparison with ordinary employees.
“Stating that you have shown sensitivity to pay and conditions across the workforce is not the same as actually doing so, or showing how you have done so.
“Where companies have compared pay for employees and executives, this usually refers only to base salary, even though the 2008 regulations imply that companies should relate to ‘remuneration’ not just salaries, which comprise a fraction of total pay for executives.”
“There are still a number of concerns regarding compliance that ought to be of interest to the FRRP. Some FTSE 100 firms have already produced reports that are subject to the new regulations, with most recording increases in chief executive’s total pay far beyond what ordinary workers might expect.”
“The regulations seem intended to improve transparency regarding the growth of executive pay in relation to wage increases for ordinary workers, and the extent to which a handful of executives take most reward for the achievements of an entire company.
“Comparisons that exclude 90% or even 99%, of a workforce surely invalidate this aim. The fact that other companies have used their global or UK-wide employee base suggests that Sage, and particularly Tui, have chosen a needlessly narrow comparator group.
“Both companies describe senior managers as the most ‘relevant’ comparison, possibly because they also receive generous bonuses and therefore make their CEO’s pay package seem less egregious. This was not the intent of the regulations.
“A cavalier attitude towards pay differentials and the regulations intended to contain them creates significant risk to employee morale in some of the UK’s key companies and is harmful to trust in business more generally.
“It also widens the gap between the super-rich and everybody else to socially and economically destructive levels, while research suggests that wide pay dispersal within companies has a detrimental effect on performance.
“As such, there is a clear responsibility on the FRRP to intervene.”