Corporate Governance-how to end excessive pay

Levels of executive pay is dominating the headlines, and this interest will only increase as the 2017 AGM season unfolds. The Department for Business Energy and Industrial Strategy is asking for views.  We think that only acknowledging that there is a problem in egregious cases of 'rewards for failure' is insufficient.  What can be learnt from businesses that are not seen as having excessive pay, for example in relation to: payment packages and incentive and reward packages; use of consultants and benchmarking; remuneration committee arrangements; disclosure practices; and organizational and industry characteristics.

  • There are two key issues which will continue to undermine public trust in business unless they're addressed; excessive pay and unacceptable corporate behaviour. We can tinker with other issues all we like , but none of those will make headlines and therefore they wont address the real issue, which is about Trust in Business. Even a small number of companies continuing to cause headlines undermines trust in the wider community.

    We can endlessly debate what constitutes excessive pay too, although here I'm happy to use the Justice Potter Stewart approach to obscenity; we know it when we see it. Most shareholders are pretty good at that too. And let's not doubt that Mrs May is also committed to taking action. We can also complain about the timing of this debate, as we enter the AGM season and as many Companies review their Remuneration policy documents ( every 3 years) and put them to the binding vote. However we have to play this ball from where it is on the pitch, not from where we'd like it to be. So what's to be done?

    The prospect of an annual binding vote on pay looms, possibly with a higher than 50% investor threshold on the vote required. Depending on the sanction, should an annual vote be lost, that prospect will make most RemComs more cautious. The easiest sanction to apply would be to disallow the entire Board's compensation for Corporation tax purposes and treat this as a prior year item in this year's accounts. Indeed the use of Corporation tax disallowance is probably the best and as yet unused weapon in the excessive pay debate. Being retrospective, however, that is still unlikely to reduce the media obsession with the issue, which is what is really needed.

    It would be far better, therefore, if retrospective vote losing situations rarely arose in the first place. To achieve that, we need greater prospective endorsement of what WILL be paid at the end of this year if performance thresholds are reached. Investors should be asked to submit a binding undertaking at the start of the year on a proposed level of pay , consistent with policy, if consensus earnings and anticipated LTIP thresholds are achieved and how this will vary with over and under achievement. Then there can be no surprises and no recriminations.

    Now i know we're going to hear the cry of " commercial sensitivity" about setting out this year's targets and no doubt our legal friends will go pale at the prospect. However let's not forget that for very many quoted companies there is a range of independent analyst estimates ( influenced by management) for all key performance measures and a consensus of those estimates established for the current year. If its not accurate then the Company has a duty to try to ensure the market's expectations are accurate. Some companies publish those estimates on their website. It can not be commercially sensitive on a one year forward basis for a Company's management to explain how its executive will be rewarded this year by comparison to a consensus of those estimates. If investors don't like the pay proposed, they have plenty of time at the start of the year to say so.

    That may not stop a subsequent argument about items taken out of adjusted earnings to achieve targets, but that's a whole different debate....
  • Following on from this morning’s news that "Chief executive pay at some of the UK's largest companies has fallen this year, as firms respond to investor pressure over remuneration packages seen as excessive".

    Is this the start of the end of excessive pay? Is shareholder pressure enough? Or does more need to be done?
  • Anonymous

    In reply to Anonymous:

    I find it worrying that companies may soon be forced to publish ratios which compare the pay of the CEO with general levels of pay in the same company. Pay ratios are easy to manipulate through job cuts, outsourcing or international relocation. Whatever you think about levels of executive pay, this feels like totally the wrong time to put UK jobs in jeopardy.