UK politicians have slammed executive pay at some FTSE 100 firms as so excessive that they are condemned as ‘corporate greed’ and put the good reputation of UK companies at risk.
A report by the Department for Business, Energy and Industrial Strategy (Beis) notes that over the last decade the earnings of chief executives at FTSE 100 firms have increased four times as much as national average earnings.
FTSE 100 CEOs earn around £4 mn ($5.2 mn) per annum while average pay is less than £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.
To help tackle excessive pay awards and deliver fairer rewards across businesses, Beis 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.
It also criticizes the ‘underpowered and passive’ Financial Reporting Council (FRC) and calls for the new regulator, post-Kingman Review, to be more ‘robust and proactive’ in bearing down on excessive executive pay and willing ‘to get tough’ with companies that fail to behave responsibly on CEO pay. The FRC did not respond to an IR Magazine request for comment.
Rachel Reeves, MP and chair of Beis, says: ‘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 dishonorable executive pay decisions at firms including Persimmon, Unilever, Royal Mail, BT, Melrose and Foxtons tell the all-too-familiar tale of corporate greed that 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.’
All the companies cited by Reeves were asked for comment by IR Magazine. BT declined; Persimmon and Melrose responded.
A Persimmon spokesperson says: ‘The remuneration numbers included in the [Persimmon] 2018 annual report reflect the vesting of the second tranche of awards granted under the 2012 long-term incentive plan, which concluded in 2018. This was a historic plan that was approved by shareholders and which on launch was expected to last 10 years, [though] we recognize that the plan did not include a cap.
‘The remuneration committee fully understands the need for pay restraint and spent 2018 working to ensure Persimmon’s future remuneration is clearly aligned with best practice and has been reshaped so that it is both lower overall and more balanced, with increased weightings on customer care and build quality.’
A spokesperson for Melrose notes: ‘We believe we have always fulfilled the key recommendations of [Beis]. Our policies are entirely transparent and based solely on creating shareholder value. Our shareholders dictate the terms and we have been happy to deliver very significant value creation for them on that basis.’
Reeves has also questioned the role of investors in the executive pay process. ‘Investors and remuneration committees have too often failed to rein in pay,’ she says. ‘When they fail, we need a regulator with the powers and mindset to step in and get tough on businesses that 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 report recommends, as a matter of practice and to reduce the risk of excessive executive pay awards and associated reputational damage, that remuneration committees should set, publish and explain an absolute cap on total remuneration for executives in any year.
While welcoming the introduction of new requirements to publish pay ratios, the report recommends expanding reporting requirements to include all employers with more than 250 employees and including data on the lowest pay band alongside the quartile data required.
