Call to end ‘eyewatering’ executive pay packages

MPs want an end to ‘eyewatering’ remuneration packages for top bosses and are calling for companies to do more to link executives’ pay to that of the rest of their workforce, in the wake of ‘shaming’ decisions such as those at Persimmon, Royal Mail and Unilever

A Business, Energy and Industrial Strategy (BEIS) select committee report said ‘huge differentials’ in executive pay are ‘baked into the pay system’. Its inquiry suggested that a heavy reliance on ‘over-generous’, incentive-based executive pay, too often waved through by weak remuneration committees in the habit of designing ever more complicated pay packages, is at the root of excessive executive pay packages.

The report noted that over the last decade chief executives’ earnings in the FTSE 100 have increased four times as much as national average earnings. FTSE 100 chief executives earn around £4m per annum while average pay is under £30,000. The report calls for businesses to move executive pay structures away from unpredictable and excessive bonuses, with a greater element based on fixed basic salary plus deferred shares.

The BEIS committee calls for a stronger link to be made between executive and employee pay, recommending businesses make greater use of profit-sharing schemes, and that companies are required to appoint at least one employee representative to their remuneration committee.

The report criticises the ‘underpowered and passive’ Financial Reporting Council and calls for the new regulator to be more robust and proactive in bearing down on excessive executive pay and willing to get tough with companies who fail to behave responsibly on CEO pay.

The committee also wants the new regulator to monitor how remuneration reports and better reporting against section 172 of the Companies Act meet the aims of increased transparency and alignment of pay with objectives. Where companies continue to ignore shareholder concerns on pay, it wants the new regulator to explore more effective sanctions than a letter from the Investment Association.

Other recommendations include expanding pay ratio reporting requirements to include all employers with over 250 employees and that the lowest pay band be included alongside the quartile data required.

The committee also said there is no reason why companies, including major legal partnerships, that can readily calculate these pay ratios should not report them first in their 2019 annual reports.  It recommends that the new regulator takes to task any company or firm that fails to explain adequately how they have taken into account pay ratios when determining levels of remuneration, particularly when pay ratios significantly exceed sector norms.

The report stated: ‘We believe that executive pay should be simplified, more obviously geared to promoting companies’ long-term objectives, and be linked more closely to that of the workforce as a whole.

‘Greater transparency and simplicity will help shareholders hold boards to account. We favour a simple structure based on fixed basic salary plus deferred shares, vesting over a long period, but subject to conditions to avoid “rewarding failure”.

‘Care needs to be taken to ensure that reforms are coherent as a package and do not permit gaming.

‘We also support the greater use of profit sharing or other schemes designed to share profits more evenly. Over time, the proportion of variable pay (including bonuses, share options and profit sharing) should be reduced substantially.’

 it recommended that remuneration committees should set, publish and explain an absolute cap on total remuneration for executives in any yea, and said the new regulator should be more’ prescriptive and interventionist’, in pursuit of these objectives and be prepared to publicly call out poor practice or behaviours.

On pensions, the report welcomed the Investment Association’s announcement in February 2019 that it will monitor and flag up any company that pay pension contributions to new directors in a way not aligned to the majority of the workforce and recommends that the new regulator seeks public explanations from any company that fails to deliver alignment on pensions contributions.

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.

‘When the company does well, it is workers and not just the chief executive who should share the profits. Why should chief executives have a more generous pension scheme than those who work for them?

‘Getting workers on remuneration committees and including staff in profit-sharing schemes should be the first steps to this end. Investors and remuneration committees have too often failed to rein in pay. When they fail, we need a regulator with the powers and mindset to step in and get tough on businesses who pay out exorbitant sums to their CEOs.’

Executive Rewards: paying for success is here.

Report by Pat Sweet

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