The government has rejected two key recommendations by a parliamentary committee for curbing “extravagant” executive pay packages, including that CEO pay should be more closely linked to the pay of their employees and that workers should be given seats on company remuneration boards.
The business, energy and industrial strategy (BEIS) committee’s report, published in March, argued firms must do more to link CEO pay to that of their workforce, and called for companies be required to appoint at least one employee representative to their remuneration committee.
However, in the government’s official response to the report, minister for small business Kelly Tolhurst rejected both the recommendations on the grounds that the government had already introduced reforms to regulate the how executive pay is set.
Tolhurst said the immediate priority was to focus on the “effective implementation and then assessment of these reforms” – which include CEO pay ratio reporting for public companies and changes to corporate governance codes requiring increased employee engagement from remuneration committees – before considering any further changes.
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The government also rejected the recommendation that workers be given a seat on pay and remuneration committees on the grounds that, although several companies were already considering inviting an employee representative to attend meetings, it would not be a suitable solution for all organisations.
Rachel Reeves, chair of the BEIS committee, criticised the government’s response, saying it represented a “missed opportunity to rein in bosses’ pay”.
“The public are rightly appalled by extravagant CEO pay packages,” Reeves said. “The success of a business is rarely solely down to the chief executive, and there should be greater efforts to ensure that workers have a share in the profits too.”
Reeves added that the appointment of a worker to remuneration committees would “bring some much-needed scepticism, challenge and perspective on executive rewards”.
Ann Francke, chief executive of the Chartered Management Institute, said she strongly supports the corporate governance reforms, but highlighted that “most of the British workforce are being denied a pay rise”. This, she said, was a reminder that CEO pay was “out of sync with the rest of the workforce”.
"The best-led businesses define their purpose not in terms of short-term financial results, but on the long-term value they create for customers and stakeholders,” Francke said. “CEO remuneration should be linked to measurable progress on these fronts and move away from complex and opaque schemes like LTIPs that are often weakly linked to executives’ performance."
She added fundamental change is needed to improve transparency and accountability from top business leaders to “restore trust in business”.
In light of the government’s response, Charles Cotton, senior reward and performance adviser at the CIPD, encouraged HR professionals to make the case to business leaders that both senior staff and employees share in the success of the company, as high CEO pay levels “won’t encourage people to go the extra mile”.
“Rather than just focusing on the financial part of an organisation, HR needs to show there are other contributors to organisational success like their people,” Cotton said. “They need to champion the case that it’s not just those at the top that deliver business success, so everyone should share in it.”
He cautioned that HR “need the credibility” and data to make the case to senior leaders that there should be more parity between executive and employee pay, which can include presenting employee attitude survey results and business data.