We ask the experts for their opinions… have your say online at: http://forum.employeebenefits.co.uk
Gavin Hayes, general secretary of Compass, the political pressure group:
Compass has launched a campaign to establish a High Pay Commission to instigate an evidence-based investigation into the effects of high pay on our economy and society.
The global economy came to the brink of meltdown in 2008 and it required global bailouts to stabilise the system. The world economy lost 2% of gross domestic product (GDP) and, according to the Office of National Statistics (ONS), the UK economy contracted by more than 4%. Liquidity is low and the cost of borrowing remains high.
Move forward to summer 2009, and research from Hewitt New Bridge Street showed that chief executive officers (CEOs) of FTSE 100 companies are still taking home 90% of their basic pay in bonuses, despite plummeting profits and dividends.
CEOs’ pay has risen far more
UK CEOs’ pay has risen far more than that of the average earner. This represents a market failure, as these firms have grown only at the same level as GDP. The FTSE 100 has also fallen about 23% in the past 10 years. In short, the typical FTSE 100 leader has been rewarded for failure. Likewise, the Treasury Select Committee found that the bonus culture in the City of London played a contributory role in the banking crisis.
All of this tells us two things. First, the system of compensation that helped cause the crisis has not gone away. Second, rescuing the financial system without real reform will not protect us from a future crisis.
This cannot be allowed to happen again. It is in the wider interest of business and society to urgently establish a High Pay Commission.
Alan MacDougall, managing director of Pirc, the advisory service for institutional investors:
Whether or not a High Pay Commission is the right approach to this issue, Pirc believes that some reflection on what is going on with respect to executive remuneration is required.
Certainly, the evidence suggests that remuneration has continued its upward trajectory, despite often steep falls in the share prices of the companies concerned. The shift to supposedly greater linkage with performance has tended to result in a rebalancing of the various elements of total packages. The net impact is that a slackening in the pace of growth tends to be seen when markets turn down, but the overall growth in total remuneration continues to be significant.
Shareholders should take some blame
Of course, shareholders need to shoulder some of the blame for this. Many have, in our view, been too willing to believe that a shift toward more performance-related rewards represents effective engagement. Unfortunately, increasingly this kind of performance linkage has, arguably, provided incentives for excessive risk-taking.
Finally, many shareholders remain unwilling to use their right to challenge companies over remuneration. So far this year, only a handful of companies have seen their remuneration report defeated.
Our preference, therefore, would be for the government to carry out a review of the seven-year experience of a shareholder advisory vote on remuneration to understand both what impact it has had and how shareholders have used this right. Based on the review’s findings, the government could then decide whether further intervention is required.
Duncan Brown, director (reward services), Institute for Employment Studies, who is one of the speakers at Employee Benefits Live 2009 on 29 and 30 September:
The Low Pay Commission has been a success, but I have three main problems with the proposal to establish an equivalent body for those at the top of the income scale. These are high, pay, and commission.
First, how would a decision be reached on what is considered ‘high’ and to whom the High Pay Commission’s mandate should apply? By all means make information on company internal pay relativities more available, but how would you factor overseas staff in low-wage economies into these calculations for multinational firms? Should corporate executives and bankers be the focus of attention anyway, given that two-thirds of Premier League football clubs’ incomes goes straight out in wage costs.
Law of unintended consequences
Secondly, what is pay? The history of legislation to define and control pay has been a lesson in the law of unintended consequences. When the last incoming US Democratic administration under Bill Clinton implemented a cap on non-performance-related executive earnings, all it did was inflate base salaries up to that level and encourage a plethora of complex, supposedly performance-related executive incentive plans.
Finally, what is a commission? A cop-out for a government afraid to confront the issue directly and raise taxation on high earners further? Or an abdication of responsibility by shareholders and their representatives to set executive pay in the context of pay throughout the organisation, making sure everyone can share in success? There are many things still wrong with executive compensation in the UK, but a High Pay Commission is not the way to address them.