The UK’s new prime minister brings executive pay back into the spotlight
Theresa May, the UK’s recently appointed prime minister, has pledged to tackle big business, promising an overhaul of corporate governance rules. Among the measures is a move toward binding votes on executive remuneration, replacing the vote’s current advisory function.
The PM has picked up on growing levels of frustration among a large section of the public in the UK, and the referendum to leave the EU shone a light on the increased unrest over inequality in Britain. With members of the public somewhat disconnected from business and political leaders, this can only mean more attention and controversy over executive pay packages.
With her appointment coming from the referendum result, May has indicated that she wants more transparency over bonus targets and has demanded that companies shed light on the ratio of chief executive pay to that of an average worker.
This is a debate with some mileage behind it already in the UK market. Over the past few years, the UK has seen the capping of pay and the introduction of binding policy votes at financial institutions. Despite these attempts to address the issue at hand, however, May is again tackling this topic with a renewed fervor. There must now be a discussion between all relevant stakeholders as to what impact a binding vote on remuneration reports may bring, particularly as it may dilute the relevance of binding policy votes.
Of course, remuneration decisions are not taken in isolation. It is the board that sets the structure and approves the corresponding payouts to executives. Therefore, in future, there may be scope for strengthening the accountability and responsibility of board members and ‒ in particular ‒ remuneration committee members.
Executive pay policies could, on occasion, be justified, provided a company has performed well. But that’s not the real issue; the real issue is ‘pay for failure’. Since 2008, investors have been under increasing pressure from the public, the government and their clients to hold company executives and boards to account for their failures.
While an obvious solution would be to refuse remuneration packages in cases of poor performance, this can be complicated, and even in the case of poor results, votes are sometimes approved in a bid to avoid wider scrutiny. Of course, the result of this trade-off can often damage a company’s reputation among external stakeholders and the media.
Even in the case of companies that have performed well, boards face a dilemma. Executives might be entitled to shareholder-approved pay packages, but companies will be open to scrutiny once high-value packages are realized. Public and media pressure can influence investor outrage where significant pay gaps are revealed – even where levels of remuneration were previously approved.
May’s proposed plans could be a positive step toward closing the gap between executive and employee pay disparity, provided the measures lead to increased accountability and transparency. In order to achieve this, pay policy must be aligned with sustainable performance to protect the long-term interests of the company and its investors – something top institutional investors, such as Fidelity International, have also been calling for. Other proponents argue that the new requirement will allow shareholders to judge the growth of CEO pay more easily, while at the same time minimizing the ratcheting up of CEO pay through improper peer group selection in corporate benchmarking.
There are critics, though. While the measures would mark undoubted progress, detractors argue that there could be potential adverse effects. These include increased burdens on compensation professionals and obstacles in regards to calculating workforce-wide pay levels, considering the differences in pay and benefits packages across large multinationals compared with those at small to mid-sized domestic companies.
There is still a need however, for clear cultural and structural changes within companies. To achieve said changes, boards and executives should look to proactively engage with investors, regardless of current circumstances, to integrate responsible policies that link pay packages to performance. There is, of course, a balance to strike: while adopting a more responsible structure where policies are more socially acceptable, companies must still appeal to the best talent in the marketplace.
Discussions with some of the top institutional investors highlight that there is no real consensus yet as to what the ideal measures should be. While there is not a great level of concern about such a vote becoming binding, the real question to address for investors is what the vote intends to bind.
Louis Barbier is country manager for France and Reza Eftekhari is UK market director at corporate governance consultancy Morrow Sodali
