Experts call for a ‘fundamental rethink’ on remuneration to help rebuild public trust in business
The asset management firm, which is owned by the BT Pension Scheme, said the increase in rewards for top talent was beginning to threaten public companies’ licence to operate, which could impact their long-term value because of the low levels of public trust in remuneration committees and investors.
The topic of executive pay has been hitting the headlines in recent months, following prime minister Theresa May’s calls – during her election campaign – to curb boardroom excesses. Recent research from PwC has also highlighted the lack of trust between British business and its customers, with two-thirds of the UK population believing executive pay is too high. This echoes the findings of a 2015 CIPD study, which found that 71 per cent of employees felt CEO pay was either ‘too high’ or ‘far too high’, with 59 per cent reporting that it directly demotivated them.
At the centre of the executive pay debate is the question of why CEOs of public and private companies are paid so differently to the rest of their workforce, as well as those in other top professions, said Hermes.
Data from the High Pay Centre shows the ratio between the pay of chief executives and the average worker has risen dramatically over the past decade – from around 70x in 2002 to 140x in 2015 – although there is little evidence to suggest pay rises have improved executive performance.
“While the FTSE is trading at broadly the same levels as 18 years ago, executive pay over the same period has more than trebled,” said the Hermes report. “We believe it is necessary to challenge the level of overall pay paid to some executives.”
The report added: “Given the responsibility that the chief executive role entails it is appropriate that the individual should be paid commensurately. It is also the case, however, that the role... is a privileged one and an incumbent is often the recipient of many highly valued non-monetary benefits.”
The study said it was important that boards explain to their workforce, and the public, the rationale behind management pay awards. To help improve accountability and fairness, Hermes suggested that the company chair should write to employees each year to explain the CEO’s pay award in the context of the company’s performance. Great engagement throughout the business ownership chain could also help to boost trust levels, it suggested.
CIPD chief executive Peter Cheese has previously criticised the disconnect between executive pay and employees’ salaries. “This gap is continuing despite our latest data showing it leads to a real sense of unfairness with a clear impact on employee motivation.
“This kind of culture in the workplace is bad for both employers and employees. When pay for those at the top is not linked to either personal performance or business outcomes, it undermines trust in business, not just from employees but from customers and other stakeholders,” he said.
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