Pay gaps between execs and workers to be disclosed under new proposals

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Government may also give employees a binding vote over reward packages; IoD director to criticise ‘foolish’ defence of high pay

Large UK companies will be required to disclose the pay gap between CEOs and average workers under new government proposals expected to be released this week.

Executive pay has been on the government radar for some time, with a 2015 report from the High Pay Centre finding that FTSE 100 CEO pay has increased to 183 times that of the average employee – compared to 47 times in 1998.

Other proposals are expected to include giving workers a binding vote over executive pay packages, as well as strategies to improve the effectiveness of remuneration committees, and extending remuneration committees’ consultations with shareholders and the wider company on pay.

The government is also considering if employee representatives should have an advisory role on remuneration committees. The Times quoted a government source who said such representatives“would help the committee better gauge any potential negative impacts on the wider workforce from disproportionately high levels of remuneration for a small number of top executives”.

However, a new report from the Big Innovation Centre (BIC) has warned that binding votes and pay ratios would damage businesses’ ability to motivate and retain top talent. “Pay ratios do not lend themselves to valid comparisons between companies, even within the same industry,” said the report. “Pay ratios may lead to pay being decoupled from performance.” It added that annual binding votes by workers on executive pay would be “a disproportionate response… and would be likely to have many negative unintended consequences”.

The report’s recommendations include simplifying pay structures; publishing a fair pay charter that outlines a company’s attitude towards fair pay and comparisons in pay trends between the CEO and workers; changes to executive pay reporting; and extensions to shareholder voting rules.

Andy Haldane, chief economist of the Bank of England and a member of BIC’s Purposeful Company Taskforce, said: “Executive pay is a matter of profound and legitimate public interest. Pay practices can encourage short-term behaviour in ways that harm both firms and the economy over the long-term. Moving pay practices in non-financial firms towards those in financial firms can help in tackling those problems.”

Commenting on the government’s proposals, Charles Cotton, CIPD adviser on performance and reward, said: “At the moment, nothing has been ruled in or out; everything is up for discussion. It would make sense for [executive pay gap reporting] to start with larger organisations, and then roll it out to other parts of the economy – not just the private sector, but the public and voluntary as well.”

Cotton said remuneration committees needed to be careful that the falling value of the pound – which has boosted revenues for many FTSE 100 companies –  does not overtly influence their decisions about executive pay. “Increased revenues might be because of that rather than the achievements of the chief executive,” he said. “And this will come at a time when the rest of the workforce is probably not going to see their packages go up that much and may be eroded over the year by the cost of living.”

Meanwhile, the director general of the Institute of Directors, Simon Walker, is expected to say in a speech to the High Pay Centre today that it would be “foolish” for executives to continue to defend high pay, reports the Guardian. “At this point the need for change is a pragmatic, even more than a moral one. I am not talking about hand-wringing or words of contrition, I am talking about corporate awareness actually tempering remuneration decisions.”

His speech is expected to continue: “After Brexit and Trump, business should expect a new level of scrutiny and questioning of their role in society. It would be foolish now for companies to close ranks and defend the high pay status quo. The seeming inevitability of executive pay rises at listed companies, especially when general wage growth remains stubbornly slow is, I think, central to public discontent.”

Cotton added: “The whole point of corporate government is not to improve the running of the company; it’s about people feeling engaged and motivated by their organisations, and that it’s being run not just in the interests of the shareholders or chief executive, but also for the rest of the workforce.”

Story via – http://www2.cipd.co.uk/pm/peoplemanagement/b/weblog/archive/2016/11/28/pay-gaps-between-execs-and-workers-to-be-disclosed-under-new-proposals.aspx

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