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Plans to tackle excessive executive pay “feeble” and “watered down”

What prime minister Theresa May promised in her manifesto regarding corporate governance and excessive executive pay has fallen flat according to many.
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Everybody needs to play by the same rules,” prime minister Theresa May divulged in a 2016 speech around corporate governance and executive pay. It followed the collapse of BHS – and the subsequent government investigation, which revealed how the company, according to the Guardian, “had been plundered by its owners”.

Some “irresponsible, privately-held companies,” May said at the time, had been leaving “staff, customers and pension fund beneficiaries to suffer when things go wrong”. This was, in large part, why the corporate governance code was extended to private businesses, and proved fuel for May’s call for new laws around executive pay.

It’s now crunch time and business secretary Greg Clark has unveiled the new laws set to be introduced in the coming months. Some 900 listed companies will be made to annually publish and justify the pay ratio between CEO and employee. Also, large businesses will need to explain how staff and shareholder interests are being taken into account.

These announcements, the government suggests, are in line with May’s previous propositions. However, they were met with dismay. Many believe the prime minister has watered down promised government reforms.

For starters, the BBC makes a good point. Her manifesto claimed executive pay would be approved by an “annual vote of shareholders”. On the contrary, the BBC explained, those facing a “shareholder revolt when it comes to pay will be named on a register overseen by the Investment Association”. Another area May has backtracked on regards employee representation on boards.

TUC general secretary Francis O’Grady went so far as to say the plan was a fraud – “Just a year ago May repeatedly proposed fundamental reform of business. That’s because there was real public concern about boardroom greed, about tax avoidance and exploitative works practices at the likes of Sports Direct. This response, I’m afraid, is feeble.”

Simon Richardson, senior lecturer in human resource management at Westminster Business School, noted that the measures – a register for companies and the publication of pay ratios – will lead to greater transparency. He echoed O’Grady’s sentiment, however, in saying it fails to “provide the ultimate sanction.”

He added: “The reason that average FTSE 100 CEO pay packages reduced by 17 per cent from £5.5m in 2015 to £4.5m in 2016 is probably because those deciding the pay packages were aware of shareholders’ likely power to veto as a result of annual majority vote becoming binding rather than advisory with the new legislation.

“Some argue the drop in FTSE remuneration is because packages in 2016 were reined back as a result of the three-yearly binding vote on new policy. Yet this seems like wishful thinking: if the good intentions included in the executive pay policies do not turn out as intended, there will be no way to lock the gate after the horse has bolted at subsequent AGMs.

“While the reduction in average CEO pay is a welcome development, the fact is that CEO pay has more than quadrupled in the past 20 years, while average UK worker pay has only increased by 50 per cent over the same period.

“As such, many would see this executive pay trend needing to be kept under control for some time to come. The pay transparency requirements in the new legislation will provide a welcome window into the CEO pay debate, but the shareholders still need more control of the process.”

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Shané Schutte

Shané Schutte is a senior reporter at Real Business, with a particular specialism in employment and business law, human resources, information technology and sales/marketing.

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