Executive pay: ‘It’s high time high pay is tackled’

The Business, Energy and Industrial Strategy (BEIS) Committee has published its report on executive pay, seeking to address the gap between some pay levels with companies and between remuneration and performance.

The report Executive Rewards: paying for success notes that over the last decade chief executives’ earnings in the FTSE 100 have increased four times as much as national average earnings, and describes this differential as having been ‘baked into the pay system’, in part by a heavy reliance on over-generous, incentive-based pay and partly by the weakness of remuneration committees.

The Committee uses the example of a £75m payment by the chief executive of Persimmon, based more on a Government initiative to encourage house-ownership rather than his own performance.

The conclusion is to advocate a simpler structure based on fixed-term salary plus deferred shares, vesting over a long period, and a much-reduced element of variable pay, and aligned to the wider social responsibilities of companies. The paper also argues for a much stronger link between executive and employee pay, for example by the greater use of profit-sharing schemes, and that there is an employee representative on the remuneration committee to strengthen this link.

Finally it welcomes the introduction of pay ratio reporting and calling the Financial Reporting Council ‘underpowered and passive’ urges the new regulator to be given tools and encouragement to be tough on those companies that behave unreasonably on executive pay and fail to adhere to the tighter requirements of the revised UK Corporate Governance Code on higher quality pay reporting.

However, there is a message too for the asset owners, with the Committee noting that the ‘primary responsibility’ for changing the environment on executive pay rests with asset owners–the pension funds.

In response, Charles Cotton, senior reward and performance adviser for the CIPD, the professional body for HR and people development, commented: “It’s high time that high pay is tackled. The growing gulf between pay for top earners and the rest of the workforce calls into question both the fairness and overall performance of our workplaces. Success is a collective achievement and it isn’t right that some top earners take home multi-million-pound packages while pay for their average worker has struggled to improve in recent years.

Full report.

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