What should we do about Executive Pay?

A recent Department for Business, Innovation and Skills (BIS) discussion paper on executive remuneration highlights that the median total remuneration of FTSE100 CEOs has risen from an average of £1m to £4.2m for the period 1998-2010, continuing an upward trajectory at a time when many are finding it hard to make ends meet. Voices of dissent, once straining to be heard above the clamour of the City of London, appear to be growing – as evidenced by the tent camps which have sprung up like brambles outside the hallowed ground of St. Paul’s, and also on Finsbury Square.

Greed is no longer good; indeed it seems to be as unfashionable as a shiny shell suit – except in Shoreditch where in some quarters that is the epitome of ironic style.  So what can, and should, be done about executive remuneration levels?

The BIS discussion paper on executive remuneration deserves to be considered in detail and raises some very interesting ideas:

  • Require quoted companies to disclose total expenditure on executive remuneration as a proportion of profit; or how the total expenditure on board pay relates to the company’s expenditure in other areas.

This seems like a logical idea providing shareholders and other stakeholders with more information about how much of the company’s profits are being invested in rewarding directors, compared to dividends and re-investment in the company; and is akin to food labelling, showing nutrition ratings;

  • Require companies to disclose fees paid to remuneration consultants.

I suspect that the vast majority of the public are equally as unaware of the role of remuneration consultants as they are about the swathes of lobbyists circling Westminster.

  • Provide shareholders with a binding vote on remuneration, and require shareholder representation on nomination committees.

Shareholders already have some limited powers concerning remuneration, but there is scope to extend these powers. For example, the Companies Act 2006 introduced the requirement that compensation payments to outgoing directors be put to a shareholder vote. Should shareholders be able to block golden parachute payments to which a director might be contractually entitled?

The discussion paper looks at the positive use of shareholder representation in (surprise, surprise) Sweden – perhaps we should also carry out some more academic research as a nation. I consider it unlikely that Mr or Mrs. Smith from Cleethorpes would be (or indeed would want to be) on the nomination committee. Such representation could well be a corporate shareholder like a pension fund, or a foreign national, as the Office for National Statistics estimates that over 40% of UK shares are held abroad.

  • Diversify remuneration committees.

The discussion paper notes that independent non-executive directors of remuneration committees tend to come from a relatively narrow pool of talent and are current or former directors of other companies and that this has been cited in several studies as potentially contributing to insufficient challenge on remuneration issues. The discussion paper suggests that perhaps a more direct and immediate way of diversifying remuneration committees specifically, might be to invite independent members to join, without requiring them to become full non-executive board members.  This would of course raise questions about their legal status and powers.

  • Require employee representatives to sit on remuneration committees, or give employees a vote on remuneration proposals.

Those in favour of this approach have suggested that proposals that appear to reward failure would face greater scrutiny, as would proposals that are disproportionately generous when compared to modest pay increases, pay cuts or even redundancies across the business.

  • Require all UK quoted companies to put in place claw-back mechanisms.

This is one of the most controversial ideas in the discussion paper, and could be difficult to police especially in situations where performance turns out to have been misstated, and this is discovered several months or years later.

  • Is there a role for an independent body to take on responsibility for improving the quality of information on and practice in respect of executive pay

This seems unlikely to get off the ground as the discussion paper records that “The Government does not believe in setting limits on pay and does not see any such body as having a role in advising on levels of remuneration or becoming a counterpart to the Low Pay Commission”.

My view is that banging fists on the table, or flying banners emblazoned with clichéd political maxims (or, I gather, quotes from the Bard seem to be more de rigeur these days) will achieve little more that attracting a crescendo of scorn, especially if St. Paul’s cathedral is closed to the public once more. So here’s a thought. Why not donate your tents to Oxfam and directly engage with the Government by taking part in the Executive Remuneration Discussion paper published on the BIS website; the deadline for responding to the discussion paper is 25 November 2011.

Philip Henson

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