Executive pay should be radically simplified to halt spiralling high pay creating inequalities last seen in the Victorian era, according a report from the High Pay Commission.
The report, Cheques and balances: Why tackling high pay is in the national interest, was released on 22 November after a year-long inquiry.
It showed ‘stratospheric’ pay increases, which have seen wealth flow upwards to the top 0.1% away from average workers.
It set out a 12-point plan based on transparency, accountability and fairness.
The High Pay Commission’s reforms include:
- A radical simplification of executive pay.
- Putting employees on remuneration committees.
- Publishing the top ten executive pay packages outside the boardroom.
- Forcing employers to publish a pay ratio between the highest paid executive and the company median.
- Forcing employers to reveal total pay figure earned by the executives.
- Establishing a new national body to monitor high pay.
Deborah Hargreaves, chair of the High Pay Commission, said: “There is a crisis at the top of British business and it is deeply corrosive to our economy.
“When pay for senior executives is set behind closed doors, does not reflect company success and is fuelling massive inequality, it represents a deep malaise at the very top of our society.
“The British people believe in fairness and, at a time of unparalleled austerity, one tiny section of society – the top 0.1% – continues to enjoy huge annual increases in pay awards.
“Everyone, including each of the main political parties, recognises there is a need to tackle top pay. That is why we are saying there must be an end to the closed shop that sets top pay, and that pay packages should be clear, open and published to shareholders and the public.”
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The report of The High Pay Commission represents an attempt to put the genie back in the bottle, proposing further disclosure and regulation as a means of further controlling executive pay.
Far better would it be if executives acted in voluntary self-restraint, as choosing to deny oneself is always superior to enforcement action and better for the soul. However, without a shared underpinning moral belief binding our society together, regulation remains a second best solution. It follows that any additional compliance obligations which ultimately flow from this report would wisely be entered into with due consideration of the potential unintended consequences.
In this connection it is important to observe the following:
The High Pay Commission focuses disproportionately on listed companies – and further future regulation might drive a higher proportion of the most capable executives out of the scrutiny of public listed companies and into boutiques, partnerships and private companies. These are much more likely outcomes than talent migrating overseas
Fund managers do not necessarily hold shares in a company for the length of time that The High Pay Commission implies, and the holding of shares does not necessarily foster an ownership mindset. This is especially so for alternative investment funds, where a fund manager’s interests might even be contrary to the long-term success of the business they are temporarily invested in.
The idea of employee representation at board level is nothing new and, as the Bullock Commission on Industrial Democracy discovered (when recommending employee representation on the board) the views of the provider of the capital, the shareholder, will always prevail.
Disclosure and the transparency of pay levels which accompanies it is a failed concept. The more transparency, the more individuals are aware of differences in their pay levels compared to others and the more likely they are to strive to equal the remuneration of their peers. This is a matter of human nature and the days when a British director would be embarrassed for others to know what he or she is earning are sadly long gone.
Policing pay will drive a compliance mindset and that does not bode well for future innovation.
Perhaps what is also required is a recognition of true impact a small number of individuals can have on a vast organisation. Many people who find themselves as directors of a major corporation are custodians of something which is long established and their true impact on the profitability or the sustainability of the company, can often be quite marginal.
In contrast, directors of smaller companies impact much more directly on the fortunes of their business, suggesting that perhaps a different remuneration model is required for smaller companies compared to large cap firms? In this sense, it is disappointing that the report does not give sufficient attention to the pay mix.
Leading employee engagement expert, Alan Crozier and author of The Engagement Manifesto says that top earners are damaging the UK’s ability to weather current economic conditions by undermining the motivation of employees. He says, “Engagement is the driver of performance and it is being sacrificed perhaps unconsciously by a few at the top.
“The High Pay Commission report today showing the rapidly growing disparity between top executives and average wages argues that high pay is creating ‘inequalities last seen in the Victorian era’.
Crozier says, “In today’s knowledge-based economy, businesses need employees’ cooperation, inspiration and ability to build relationships, but there’s precious little motivation in knowing that directors’ pay has risen almost 50% in a year – unrelated to performance – when pay increases are pegged at 3% and inflation is rising.
“The old chestnut that you need to pay top whack to retain top talent ignores the fact that top talent needs talent around them to deliver results. .
“It beggars belief that directors are so oblivious to the consequences of allowing such disparity. Total returns to shareholders haven’t risen at the same rate as executive pay; and if those funds are available for reward surely they could be distributed more equitably. Of course senior executives should be well rewarded, in line with their contribution and the internal relativities of their business.”
.“The CEO and his executive directors make promises to shareholders and customers that rely on employees to deliver, but when staff feel they are being used they become cynical. Trust is a fragile commodity and once lost, morale plummets at the very time we need it to remain high. And it’s the talented employees who are first out the door because they are marketable”.*
Alan Crozier has recently joined the UK Government’s Task Force on Employee Engagement’s Guru Group, set up by the Department for Business Innovation & Skills (BIS). He is the author of the recently published book, The Engagement Manifesto. He is also a founder of The Ghost Partnership.
*According to the CIPD (Chartered Institute for Personnel & Development) recent survey, 22% are currently looking for a new employer. “That represents a significant potential attrition cost in terms of recruitment costs, induction and training, plus lost knowledge and business relationships” says Crozier.
Commenting on the High Pay Commission report, Tom Gosling, remuneration partner at PwC, said:
“Some of the High Pay Commission’s recommendations are sensible. In particular we have long argued for a simpler model of executive pay, relying on long-term share-holding to create alignment with investors rather than complex long-term incentive plans which rarely motivate executives to perform better.
“But we do need to be clear on what problem we are trying to solve. There’s a danger that concern about executive pay levels is being dressed up as a debate about alleged market failure but there is little evidence that this is the case.
“Undoubtedly companies listed in the UK, which are increasingly international in nature, have to compete globally for executive talent. Many FTSE companies come to the UK just to raise capital and have the bulk of their operations elsewhere. What counts is whether the owners of companies – mainly institutional Investors – have the tools to have a significant influence on executive pay. The truth is that they do if they want to. Almost all companies respond to significant investors’ votes against the remuneration report or the re-election of directors. The reality is that investors recognise that there is a global market for talent and are generally happy with the level of reward on offer. Shareholders are not focused on absolute pay numbers in isolation, but do review in line with company performance.
“Ideas such as a distribution statement, encouraging diversity of boards, disclosing a single figure for remuneration, and simplifying executive pay all have merit, and may bring minor improvement to the operation of the market for executive pay. However, some of the proposed disclosures are likely to have unintended consequences. Pay ratios between the CEO and median employee are more likely to encourage spurious comparisons between companies than to enlighten the debate on executive pay. And history suggests that further disclosure of pay below board is unlikely to lead to increased restraint – the opposite impact is more likely. What would help allow more informed judgements is better disclosure on the reasons behind decisions on executive pay.”