How to end excessive pay?

Everybody has an opinion on executive pay, and we want to hear what you think and why.  

Politicians and journalists often say that there has been a market failure, and remuneration committees, institutional investors and remuneration consultants get the blame. The company boards who are ultimately responsible for executive pay seem unwilling or unable to change. Unfortunately it can be safer to ignore anxiety and shelve good intentions.  Sticking with remuneration schemes which are tried and tested is the best way to avoid attention.

At the centre of this debate are key questions around whether business leaders add sufficient value to justify what they get paid, and the fair distribution of wealth in the workforce. Only acknowledging that there is a problem in egregious cases of 'rewards for failure' is insufficient, but where do we go from here? 

Following in the footsteps of the US, UK listed companies will soon be required to publish a simple ratio which compares CEO pay with the pay of median pay of UK employees.  Will ratios prompt a mature national conversation on pay, or will there be an exodus of talent from the UK?  

Our paper on how to end excessive pay challenges boards to not give up on the tricky issue of executive pay. Boards can no longer attempt to delegate their responsibility to committees or advisers. Responsible boards must roll up their sleeves and take a fresh look at this issue, and they must keep an open mind about whether they can justify current pay levels or whether change is needed.  We have suggested a ten point action plan for boards which includes inspirational real-life examples. Boards which don't follow all of the steps risk continuing criticism, and this fuels the decrease in trust in business. Inertia also puts the UK's reputation as an international leader in corporate governance in jeopardy.  

Do you agree that failure to act is no longer an option, or are you concerned that the issue has been exaggerated for political or other ends? If you think we've got it right then please say so, but we're just as keen to hear why we've got it wrong, especially if we've missed alternative approaches which will put an end to excessive pay more quickly or efficiently.

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  • 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....
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