“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,” said the Business, Energy and Industrial Strategy (BEIS) Committee report on executive pay, Executive Rewards: Paying for Success, published today.
To help tackle excessive executive pay the committee suggested a reduced maximum cap and that rewards on good performance should be “more evenly shared”. CEO pay should also be simplified, geared towards long-term objectives of the business and more closely aligned to the entire workforce – including the greater use of profit-sharing schemes. Executive pay should not continue to “reward failure”, the report said.
It welcomed the proposed replacement of the “underpowered and passive” Financial Reporting Council and recommended that the new regulator be “given the tools and encouragement to be tough on those companies that behave unreasonably on executive pay and fail to adhere to the tighter requirements of the revised UK Corporate Governance Code on higher quality pay reporting.”
According to the High Pay Centre, the median annual salary for a full-time worker in the UK is £29,574, while for a FTSE 100 CEO it is £3.93m. Over the last decade FTSE 100 chief executives’ earnings have increased four times as much as national average.
Rachel Reeves, chair of the BEIS committee, said, "Eye-watering and unjustified CEO pay packages are corrosive of trust in business and threaten to undermine the public’s support for the way our economy operates. The roll-call of dishonourable executive pay decisions at firms including Persimmon, Unilever, Royal Mail, BT, Melrose and Foxtons, tell the all too familiar tale of corporate greed which is so damaging to the reputation of business in our country. But these examples also highlight the persistence of executive pay policies where far too little weight is given to delivering genuine long-term value, investing in the future, or ensuring rewards are shared with workers.”
Elizabeth Richards, ICAEW head of corporate governance, Technical Strategy Department, said, “We share the committee’s concerns about executive pay overshadowing all other business achievements and challenges. Anger over executive pay is fuelling the growing tension between business and society.
“The recommendations made in today’s select committee report leverage the familiar tools of transparency, certainty and employee involvement,” she added. “ICAEW has developed a different solution [regarding] how to end excessive pay which centres on company boards and CEOs taking a business-like approach to the problem. A company which fails to follow our 10 point action plan has no grounds for complaint if people think that their executive’s pay is excessive.
Andrew Ninian, director of stewardship and corporate governance at The Investment Association, said, “Investors have been consistently clear that companies need to do more to ensure executive pay is aligned with company performance and at levels that are justifiable to shareholders. In order to deliver fair pay, we have to ensure that remuneration committees are considering all aspects of executive pay alongside the pay of the wider workforce, which is why The Investment Association has focused on pension contributions in this year’s AGM season.
“As the committee have recognised, shareholders want to see pension contributions for executives come down so that they are paid in line with the majority of the workforce,” added Ninian.