WHERE does reward for good service end and greed begin?
It’s a question that has vexed the minds of policymakers and activist shareholders for years. The swollen pay packages awarded to senior figures at many PLCs seem to defy good business sense and morality. But it’s always been hard to muster effective opposition to pay awards that seem far too generous.
As Paul Scholey, of Morrish Solicitors observed: “Just three working days into 2018, the average CEO of a FTSE 100 company had already earned nearly £29,000 – more than the amount a typical worker earns in a year.”
In late 2017, the Financial Reporting Council published proposals for a revised corporate governance code, which included giving remuneration committees broader responsibility for overseeing how “remuneration and workforce policies align with strategic objectives”.
Sceptics are not convinced that these planned changes will lead to the death of the bloated bonus culture. In their joint response to the consultation over the new corporate governance code, the UK Individual Shareholders’ Society (Sharesoc) and the UK Shareholders’ Association (UKSA) said: “It is not clear why well-paid directors of companies have to be given large bonuses to come to work and do the job they are already paid to do by way of their basic salary.
“It is good that they should be encouraged to hold shares in the company that employs them. However, they should do this by buying shares themselves in the market like any other investor.”
The groups said that it seems “very unlikely” that the changes proposed will give meaningful impetus to boards in exercising discretion.
Earlier this year, Sir Ronald Hampel, a leading figure in developing corporate governance codes, noted that executive pay was “out of control”.
As the group’s joint response noted: “Sir Ronald’s observation is a clear sign that it will take more than a few tweaks to the wording of the remuneration section of the corporate governance code to give meaningful impetus to boards in exercising discretion or restraint.”
Surely, the best corporate governance will force the board to set directors’ pay in the context of the pay schemes that operate for everyone else in the company?
Sharesoc and UKSA believe shareholders should be allowed to quiz the board on any anomalies including, for example, why any director is getting an increase in basic pay of more than five per cent, when, say, everyone else is getting less than two per cent. If the board can’t provide convincing answers to this and similar questions, then it must be forced to think again.
As the Sharesoc and UKSA submission states: “It should provide a better way of holding the remuneration committee to account in a situation in which directors’ pay seems to have parted company with everyone else’s.”
Perhaps the most effective way of ensuring greed does not destroy trust in Britain’s PLCs is to create a formal shareholder committee system, which must be consulted at an early stage in the executive pay negotiation process.
This committee could include workers. This approach could mean that executive pay is finally built around fiscal prudence.