UK MPs' Proposals On Curbing Excessive Corporate Pay Resonate For Ethics And Society
On a day in Britain when it feels very much as if everything is broken, there is an important report out from the UK parliament’s business select committee that points to one step forward on repair: the critical need to join up the dots in the debate around the fundamental role of business in society.
The Business, Energy and Industrial Strategy (BEIS) report, Executive Rewards: paying for success, calls for the country’s biggest companies to link the pay of those at the top with the rest of the workforce, bringing to an end “huge differentials in pay between those at the top and at the bottom” which “remain the norm”, and suggesting that they will be held to account if they do not.
“Executive greed, fed by a heavy reliance on incentive pay, has been baked in to the remuneration system. With that comes a public perception of institutional unfairness that, if not addressed, is liable to foment hostility, accentuate a sense of injustice and undermine social cohesion and support for the current economic model (Paragraph 10)” says the report in its conclusions and recommendations.
It notes that over the last decade chief executives’ earnings in the FTSE 100 have increased four times as much as national average earnings. FTSE 100 chief executives earn around £4 million per annum while average pay is under £30,000. Analysis last year showed that CEO median pay rose by 11% between 2016 and 2017, despite prominent criticism from the investor community and the Government over excessive CEO pay awards.
Calling for a stronger link to be made between executive and employee pay, the select committee recommends that businesses make greater use of profit-sharing schemes, and that companies are required to appoint at least one employee representative to their remuneration committee.
“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. The roll-call of dishonourable executive pay decisions at firms including Persimmon, Unilever, Royal Mail, BT, Melrose and Foxtons, tell the all too familiar tale of corporate greed which is so damaging to the reputation of business in our country. But these examples also highlight the persistence of executive pay policies where far too little weight is given to delivering genuine long-term value, investing in the future, or ensuring rewards are shared with workers.” said Rachel Reeves,MP and Chair of the Committee.
“When the company does well, it is workers and not just the chief executive who should share the profits. Why should chief executives have a more generous pension scheme than those who work for them?” she asked.
Getting workers on remuneration committees and including staff in profit-sharing schemes should be the first steps to this end, she said. “ Investors and remuneration committees have too often failed to rein in pay. When they fail, we need a regulator with the powers and mindset to step in and get tough on businesses who pay out exorbitant sums to their CEOs” she added.
The concept of employee representation in Britain’s boardrooms is one at which big business is prone to shudder. It goes fundamentally against an elitism that is historic, built in to the system and blocking progress on true diversity and inclusion.
But such innovation is increasingly essential to embrace to maintain the current economic model in fast-changing times within the shadow of austerity .Both Britain’s Trades Union Congress (TUC) and CIPD, the professional body for human resources and professional development, have welcomed the report.
TUC General Secretary Frances O’Grady said: “We need businesses that contribute to the long-term success of Britain. But it’s still too easy for top execs to use firms as their personal cash cow, instead of sharing success with the workforce – the real wealth creators. The Committee’s recommendations could help change things for the better. “
She added that while putting workers on executive pay committees “would inject some much-needed fairness and reality into pay awards….ideally there should be at least two elected workers instead of a single isolated voice..” Her comment hearkens back to the notion that one woman on an all-male board is somehow a fair representation of another gender perspective - an idea that is now increasingly recognised as tokenism, rather than an indication of a desire for change.
At the CIPD, Charles Coton, senior reward and performance adviser for the CIPD said: “It’s high time that high pay is tackled. The growing gulf between pay for top earners and the rest of the workforce calls into question both the fairness and overall performance of our workplaces.”
“We want to see a new, broader definition of corporate success that goes beyond profit and loss and also looks at how people are managed, rewarded and developed and how customers are treated. 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 added.
The link between fairness and overall performance and productivity of the workplace is an important one for business to get its head around. Like gender diversity, this is not an isolated issue agenda. To put it bluntly, money is important not just because of what it buys, but because of what it says - and extreme disparities in earning levels that defy comprehension also set people apart in ways that are then hard to reconcile.
As Bob Dylan famously sang, “Money doesn’t talk, it swears.” (YouTube link here, if you need distraction.)
The real reason we need to curb excessive executive pay is not just because of the need to focus harder on fairness now, amid economic inequality and social division. It is also because of the fundamental part money plays in the making of ethical decisions which support our concept of what we want our society to be.
As I wrote in my first post on the use of Non Disclosure Agreements (NDAs): “ In Britain we have chosen (rightly, in my view) not to give financial incentives for whistle-blowing. Money is deemed best left out of it, in case it muddles the ethics.”
Regularly earning stratospheric amounts risks placing some individuals on godly levels, beyond identification, empathy and critically, accountability. A sense of entitlement can be a perilous thing for anyone but in the hands of those with power it risks becoming self-fulfilling and dangerous.
As this piece by David M.Mayer who has spent 20 years researching moral psychology explores, “when it comes to the wealthy and privileged, a sense of entitlement, or a belief that one is deserving of privileges over others, can play an important role in unethical conduct.” That could be why the much hyped Senior Manager’s Regime introduced by the UK regulator has shown itself capable of being all too easily dismissed.
The seemingly random dots do joins up - from worker productivity to boardroom conduct to corporate behaviour. Remuneration, clarity of role definition, accountability and reward is an intrinsic part of corporate governance, the essence of a business. It’s another good reason to find a way to allow employees real access to boardrooms. If the structure cannot countenance it, change the structure.
The report also recommends that, as a matter of practice, and to reduce the risk of Persimmon-type awards and associated reputational damage, that remuneration committees should set, publish and explain an absolute cap on total remuneration for executives in any year.
On pensions, it welcomes the Investment Association’s announcement in February 2019 that it will monitor and flag up any company that pay pension contributions to new directors in a way not aligned to the majority of the workforce .
The report also recommends that the new regulator replacing the Financial Reporting Council (FRC) seek public explanations from any company that fails to deliver alignment on pensions contributions. At a time when we are very easily distracted, it makes valuable points for the country’s long-term future.