Louise’s lowdown: Government steps up executive pay scrutiny

Louise Fordham Headshot 2016

On 16 September, the Business, Innovation, and Skills (BIS) committee launched an inquiry into corporate governance, which will remain open to submissions until 26 October. One of the areas of focus for the inquiry is board composition, including the question of worker representation in the boardroom and on remuneration committees, and the form that this could take. The inquiry’s scope also extends to executive pay: how executive pay should take into account long-term business performance; what has driven the significant increase in executive pay relative to that of other employees; if, and how, executive pay should reflect the value added by executives relative to other staff; if shareholders should play a greater role around executive pay; whether there is evidence that executive pay is indeed too high; and if, and how, government should seek to control executive pay.

The inquiry follows the corporate governance failings brought to light by the recent inquiries into BHS and Sports Direct, as well as prime minister Theresa May’s commitment to ensuring high standards of corporate governance. In a speech delivered on 11 July, shortly before she was appointed leader of the Conservative Party and prime minister, May made it clear that boardroom practices and executive pay were very firmly set in her sights.

In addition to employee representation, May called for greater pay transparency, including publication of the ratio between chief executive officer (CEO) pay and the average employee’s pay. May’s sentiments echo disquiet among shareholders, appearing against a backdrop of shareholder revolts over pay packages considered excessive.

According to the High Pay Centre’s FTSE 100 State of pay report, published in August 2016, the average FTSE 100 CEO’s pay was £5.48m in 2015, with total remuneration rising substantially above that figure at some high-profile organisations. This is so far out of sight of the average employee’s pay that it is unsurprising the Britain at work 2016 report, published by Lansons and Opinium in April 2016, found that more than a third (38%) of employees believe that senior leaders are overpaid.

Ill-feeling towards pay perceived to be excessive is not directed at senior leaders alone; research by the Chartered Institute of Management Accountants (CIMA), published in September 2016, found that 62% of finance professionals feel that unjustified bonus awards cause resentment among colleagues. Perceived unfairness around pay and reward, at all levels of an organisation, can have a negative impact on employee morale and engagement, which can, in turn, affect staff retention rates, individual and business performance, and, ultimately, profit.

In her 11 July speech, May also stressed the need to simplify bosses’ bonuses so that they align with the long-term interests of organisations and their shareholders. A well-designed compensation and benefits strategy that reflects an organisation’s core values, as well as the value it places in all of its employees, is good for businesses and staff alike. There is much work to be done to ensure that remuneration is transparent and works for the benefit of all, thus avoiding alienating employees and hampering organisations’ wider efforts to engage and support their staff, and, at present, it seems that May is determined to drive this agenda forward.