The Business, Energy and Industry Strategy (BEIS) Committee recommends that employers’ remuneration committees should set, publish and explain an absolute cap on executives’ annual total remuneration in order to encourage fairer pay practices.
In its Executive rewards: paying for success report, published on 26 March 2019, the BEIS Committee states that organisations need to do more to link executive pay and employee pay in order to eliminate existing pay differentials. Its analysis further identified that complicated incentive-based pay lay at the root of excessive executive pay packages.
Rachel Reeves MP, chair of the BEIS Committee, said: “When the [organisation] does well, it is [employees] 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?
“Getting [employees] on remuneration committees and including staff in profit-sharing schemes should be the first steps to this end. 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 [its chief executive officers (CEOs)].”
The report, which attempts to address the gap between chief executive pay versus organisation performance and employee pay, proposes that executive pay structures veer away from being bonus based and instead have a greater element around fixed basic salary and deferred shares. The report further suggests that to strengthen the link between executive and employee pay, organisations should make greater use of profit-sharing schemes and be required to appoint at least one employee representative to its remuneration committee.
In addition, the BEIS Committee suggests that reporting and publishing requirements for pay ratios are extended to include all employers with more than 250 employees and that the data on the lowest pay band is included alongside the necessary quartile data.
To pensions, the report welcomes the Investment Association’s work to monitor and flag organisations that pay pension contributions to new directors in a way that is not aligned to the majority of the workforce, however the BEIS Committee also recommends that the regulator seeks public explanations from any employer that fails to deliver alignment on pension contributions.
Charles Cotton, senior reward and performance advisor for the Chartered Institute of Personnel and Development (CIPD), added: “Organisations need to review the best way of rewarding [its] senior people. [Employers] must question whether executive long-term incentive plans are delivering quality and sustainable outcomes for businesses or just driving short-term profits that benefit few.
“There needs to be a much stronger link between corporate performance and the remuneration of all [employees], including those at the top. 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.”