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Addressing discontent over executive pay

26 Nov 2019 By Alison Gill

With the new parliament expected to conduct an inquiry into ‘corporate greed’ at Thomas Cook, there are three things employers need to consider when it comes to how much their leaders earn, says Alison Gill

Few people would question the need for a Thomas Cook inquiry to investigate why bosses took £20m in bonuses while overseeing the collapse of the company, resulting in the loss of 9,000 jobs and stranding 150,000 Brits abroad. However, it’s not just corporate failures creating a backlash against current levels of executive pay.

Since January, listed companies employing more than 250 people have had to publish the difference between what their CEO is paid and what the average worker gets paid, under new corporate governance requirements. This has revealed that it would take most workers two lifetimes to earn what top execs get in a single year, with the average FTSE 100 boss earning £3.5m a year – 117 times the average full-time UK worker’s salary of £29,574.

Although this has fallen by 13 per cent compared to last year, the business select committee wants more to be done to make sure businesses are sharing rewards with workers, so here are three things employers can do to respond:

Broaden your talent pool

Boards are under a lot of pressure to be seen to be governing wisely and not taking unnecessary risks. This can often create boardroom desire to hire a ‘tried and tested’ chief executive, with a ‘proven’ record and relevant industry experience. 

However, these individuals come with a hefty price tag and no guarantee of success. So one of the best ways to close the differential between CEO and employee pay is to look outside the usual closed groups and networks, placing less importance on existing track record and industry experience and more focus on the behaviours and competencies needed to successfully run a business. Female CEOs, for example, cost 54 per cent less than their male counterparts, even though research by McKinsey shows companies in the top quartile for gender diversity are 20 per cent more likely to have above-average financial performance.

Support remuneration committees

Remuneration committees need to be given the same level of support as risk and audit committees so important issues, such as what more could be done to link bonuses to the long-term sustainability of the business, can be discussed.

However, in reality, the topic of executive pay may not have enough time allocated to it. Meaning that while individual directors might highlight concerns to the chair of the remuneration committee, there often isn’t the opportunity to raise and discuss them collectively in board meetings. Also, chairs of remuneration committees often report what a lonely and unrewarding job it can be. So it’s important that the individuals tasked with this huge responsibility are given the time and support needed to get under the skin of what action needs to take place and how best to make it happen.

Recognise it’s an emotive issue

With one in five workers skipping meals to make ends meet and two-thirds saying their biggest concern about work is pay not keeping up with living costs, tolerance for large director bonuses while wages continue to stagnate is at an all-time low.

Employers that want to reduce the reputational risks now associated with the issue must think carefully about their duties under revisions to section 172 of the Companies Act 2006, which require the director of a company to “act in the way he [or she] considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole” – specifically including “the interests of the company’s employees”.

This requires thinking about how best to create a culture of fairness when it comes to sharing any company profits. For example, could the consequence of a multimillion-pound director bonus be that no one else gets a pay rise? Are directors carrying enough risk, with their packages linked to transparent and meaningful long-term measures of performance? And where rewards for success are offered, are these being linked to broader objectives, such as the impact of the company on employees, society and the environment?

Alison Gill is CEO of Bvalco

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