Discussions about whether workers should help set executive pay

In October 2011 the UK government launched a discussion paper on executive remuneration in response to criticism that generous executive pay packets bear little relation to company performance or to the develoment of employee wages. One option floated in the paper is a requirement for employees to be represented on the remuneration committees that set senior managers' pay in listed companies. Unions welcome the move, but some employer representatives are nervous.

Executive pay in the spotlight

In recent years, and especially since the financial crisis erupted in 2008, the remuneration of senior managers in the UK has come under increasing public and political scrutiny. Critics claim that the pay awarded to many executives bears little relation to either the performance of the companies they manage or the development of other employees’ wages.

A 2011 survey by Manifest and MM&K (206Kb PDF) found that the median remuneration of the chief executives of the London stock exchange-listed companies that make up the ‘FTSE 100’ share index rose by 32% from 2009 to 2010, while the index increased by only 9%. From 1998 to 2010, chief executives’ remuneration increased fourfold while share prices remained flat.

Meanwhile, employees’ average earnings have increased only slowly since the start of the recession, and have been outstripped by rising inflation. Figures from the Office for National Statistics show that in the period May to July 2011 the annual growth rate of average weekly earnings stood at 2.8%, while inflation (measured by the consumer prices index) was running at 4.4% in July.

On 19 September 2011, the Department for Business, Innovation and Skills (BIS) issued a discussion paper on the executive remuneration, setting out wide-ranging proposals on linking that remuneration more closely to company performance, and inviting views from stakeholders.

Vince Cable, the Secretary of State for Business, said that executive remuneration that is ‘well structured, clearly linked to the strategic objectives of a company’ and ‘rewards executive directors who contribute to the long-term success of that company’, is important in promoting business stability and growth. However, he pointed towards a ‘general disconnect between pay and long-term performance’ and raised concerns about ‘perverse incentives’ and ‘excessive levels of reward’.

Employee representatives on remuneration committees

Among the innovative ideas floated in the BIS discussion paper is the inclusion of employee representatives in company remuneration committees. These committees, appointed by the board of directors and made up mainly of non-executive directors, set the remuneration of executive directors. While not required by statute, the use of such committees is stipulated by the UK Corporate Governance Code (159Kb PDF) and they exist in all large listed companies.

The discussion paper asks whether employee representation on remuneration committees might improve executive pay-setting, by:

  • encouraging challenges to proposed remuneration packages;
  • bringing a different perspective to the discussion; and
  • ensuring that pay and conditions elsewhere in the company are genuinely taken into account, as required of remuneration committees by the UK Corporate Governance Code.

Remuneration proposals that, in the words of the discussion paper, appear to reward failure might face greater scrutiny from employee representatives, as might proposals that are ‘disproportionately generous when compared to modest pay increases, pay cuts or even redundancies across the business’.

The paper acknowledges that practical issues would have to be addressed, such as the extent and legal status of employee representation, and the election method for representatives. It states that an alternative and potentially simpler way of securing employees’ input into the process could be to offer them a non-binding ‘endorsement vote’ on executive remuneration decisions.

Social partner reactions

The Trades Union Congress (TUC) has been calling for employee representation on remuneration committees since the 1990s. TUC General Secretary Brendan Barber commented:

Workers’ representatives on remuneration committees will help regain public confidence in executive pay by adding a sense of perspective and forcing directors to explain how their rewards relate to those offered to their workforce.

However, he warned that ‘any attempt to seriously reform executive pay will be fiercely resisted by vested interests’.

The employers’ organisation, the Confederation of British Industry (CBI), welcomed the consultation but warned that ‘executive pay must not become a political football’ and opposed ‘overly simplistic measures’. It accepts that executive pay should be ‘squarely linked to performance’ but notes that ‘the jobs market for senior company executives is one where talent competes globally’.

Charles Cotton, performance and reward adviser at the Chartered Institute of Personnel and Development (CIPD), which represents human resources professionals, suggested that selecting suitably informed employee representatives would be problematic. Employees might also fear that opposing executives’ pay packages could harm their career prospects.

Responses to the discussion paper are due by 25 November 2011. It may then become clear whether there is any political will or consensus in the Conservative-Liberal Democrat coalition government to introduce employee representation on remuneration committees. This policy is supported by the opposition Labour Party. Such a move would be a radical departure for the UK which, unlike many continental European countries, has no statutory system of employee participation on company boards (TN9809201S).

Mark Carley, IRRU/SPIRE Associates

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