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Executive pay – link bosses' pay to workers, say MPs

26 March 2019

Companies must do more to link top bosses' pay to that of the rest of their workforce, say the Business, Energy and Industrial Strategy (BEIS) Committee in a report published today.

Huge differentials in bosses' pay baked into pay system

Referencing “shaming” executive pay decisions such as those at Persimmon, Royal Mail and Unilever, the report says that “huge differentials” in bosses' pay are “baked into the pay system”. 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, say the BEIS Committee.

Move executive pay structures away from unpredictable and excessive bonuses

The report notes 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 £4 million 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.

Committee calls for stronger link between executive and employee pay

To help tackle excessive pay awards and deliver fairer rewards across businesses, 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 finds that the “say on pay” reforms introduced in 2014 have had some impact in curbing levels of new pay awards, which have remained fairly flat over the last decade.

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.

Chair's comments

Rachel Reeves MP, Chair of the Business, Energy and Industrial Strategy 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.”

"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.

"Public scrutiny has often had more influence than investors or remuneration committees in getting companies to reverse outrageous executive pay decisions. The glare of publicity cannot be the only weapon in the armoury, but companies should be assured that the BEIS Committee will continue to shine a light on executive pay and hold businesses to account for their actions on CEO rewards".

Absolute cap recommended on total renumeration for executives in any year

The report recommends that, as a matter of practice, and to reduce the risk of Persimmon-type awards and associated reputational damage, that remuneration committees should set, publish and explain an absolute cap on total remuneration for executives in any year.

On pensions, the report welcomes 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.

While welcoming the introduction of new requirements to publish pay ratios, the report recommends reporting requirements are expanded to include all employers with over 250 employees and that data on the lowest pay band be included alongside the quartile data required.

Further information

Image: Copyright Bank of England