But consensus does not extend to how it should be tackled, says Duncan Brown
Another week, another call for executive pay restraint. The Financial Times reported recently that business minister Vince Cable will be calling for remuneration committees to set ceilings on the executive pay rises. Proposals will be in the government’s review of the first year of his ‘say on pay reforms’ to be published in the coming weeks. Those reforms gave shareholders a binding vote on pay policy and exit payments and attempted to improve the transparency of executive packages in annual reports.
At a public debate on exec pay I recently spoke at, hosted by Queen Mary’s University and The High Pay Centre, there was a remarkable level of agreement amongst the diverse parties about the nature of the problem and that further reform and change is needed to address it. The consensus was very much that average remuneration of over £4 million for FTSE 100 CEOs is too high.
At times if you had shut your eyes you might have thought that the strong denunciation of the initial package offered by BG Group to incoming CEO Helge Lund (reduced after shareholder pressure) was made by assistant general secretary of the TUC Paul Nowak rather than Oliver Parry, senior advisor for corporate governance at the Institute of Directors.
All agreed the government reforms have had some effect, with total remuneration for CEOs falling by 7 per cent in 2013, while executive pay awards now generally track those of the whole workforce, rather than outpacing them.
But there was less unanimity on the solutions, which was perhaps not surprising when there are obviously no easy answers. Pay caps may sound delightfully simple and politically attractive, but the problems with them are highlighted by the $1 million ceiling on non-performance-related earnings introduced by President Clinton in the 1990s. Any self-respecting CEO earning less than that immediately felt underpaid. And there was an explosion in the sorts of complex, apparently performance-related incentive plans which now blight the field on both sides of the Atlantic, and which companies such as Tesco are starting to simplify.
Reforming pay governance by placing an employee representative on the remuneration committee might sound similarly appealing. Yet without wider employee involvement through German-style company boards their level of knowledge and influence must be highly questionable. Publishing internal pay ratios might help, but as in the USA, has already raised major issues of definition and measurement.
Perhaps, as in the related area of gender representation and pay, we are expecting too much of legislation. The CIPD’s recent review of Employment Regulation and the Labour Market across the OECD concludes that “good workplace practice matters much more to the quality and efficiency of work than employment legislation”. And so there is a vital role for HR to play, in educating remuneration committees on the reality of rewards in the wider organisation and in ensuring that all employees, particularly the low paid, share in their employers’ success.
“Why don’t the same systems of job evaluation, pay structures and bonuses apply to executives as they do to the rest of the workforce?” asked one of my most perceptive students in the HRM MSc class at Kingston University I teach. Why not indeed?
They did, I told him, when I started out on my career in HR.