Listen to employees when setting executive pay, say MPs

27 Mar 2019 By Emily Burt

Parliamentary report criticises ‘eye-watering’ CEO pay packages, as CIPD urges focus on broader measures of success

Taking the views of workers into account on remuneration committees is an important step in tackling excessive executive pay, experts have said, following criticism of “eye-watering and unjustified” CEO packages by a parliamentary select committee. 

A new report from the Business Energy and Industrial Strategy (BEIS) committee, Executive Rewards: Paying for Success, called for greater transparency and accountability in organisational approaches to pay, and stronger links between executive and employee reward.

According to its findings, FTSE 100 chief executives earn an average of £4 million per annum, while the average full-time worker’s salary is under £30,000.

The committee said employers needed to forge stronger links between executive and employee pay, arguing that reward at the top should be explicitly geared towards the long-term objectives of a company, with workers benefiting from schemes such as profit-sharing and representation on company remuneration committees.

"Eye-watering and unjustified CEO pay packages are corrosive of trust in business and threaten to undermine the public’s support for the way our economy operates,” committee chair Rachel Reeves said yesterday. "When the company does well, it is workers and not just the chief executive who should share the profits.

“Getting workers on remuneration committees and including staff in profit-sharing schemes should be the first steps to this end.” 

Reeves added that pay decisions made by companies such as Persimmon, which faced protests last year after seeking to award CEO Jeff Fairburn a £75 million bonus, were “damaging... the reputation of business in our country”. 

Charles Cotton, senior reward and performance adviser for the CIPD, stressed the importance of a “broader definition of corporate success that goes beyond profit and loss and also looks at how people are managed, rewarded and developed.

“To support this, we welcome the idea of the employee perspective being part of the pay governance process as part of broader reform of remuneration committees,” he said. 

The CIPD issued a report in January calling for HR professionals to be better represented on remuneration committees, as well as emphasising the importance of focusing on salary rather than long-term incentives when setting executive pay. 

Hazel Rees, remuneration committee advisor and senior reward consultant at Willis Towers Watson, agreed it was important for remuneration committees to consider executive pay in the context of the wider workforce.

“My experience is that representatives can work well to inform remuneration committees more generally, so they are not making executive pay decisions in isolation,” she said. 

However, she stressed that electing individuals to remuneration boards could be difficult to deliver in practice. “Whether these individuals need to be a member or regular attendee who provide oversights and insights into pay in the workforce is more complex,” she said. 

“On balance, organisations would be more likely to take the approach of seeking reviews and engaging with the workforce more thoroughly, than electing one individual to their RemCo.” 

Dr Roger Barker, head of corporate governance at the Institute of Directors, warned that while it was important to bring employee perspectives to remuneration committees, appointing people who were not board members would create “significant” challenges regarding governance.

“Would they share the fiduciary duties of other directors? Would they be in a position to integrate discussion of remuneration issues with the overall strategy of the company?,” he asked, adding: “Although superficially attractive, we doubt that such a measure would be a positive step forward for UK corporate governance."

The news follows protests over pension payouts made to the UK’s top executives, particularly in the financial sector, after it was revealed organisations including Lloyds and insurance firm RSA had been linking executive pensions to final salaries, a practice that has largely been ended among the rest of the workforce. 

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