Excessive executive pay is part of a wider problem.
In a long-awaited corporate crackdown, the Prime Minister has set out her plans for curbing executive pay. Mrs May’s blueprint empowers shareholders to veto pay packages for overpaid bosses, puts workers on remuneration committees, and forces companies to publish the pay gap between CEOs and average workers.
With many searching for new answers, Mrs May is right to prioritise overhauling Britain’s corporate economy. But, while these reforms are more radical than the rules they build on, they’re not radical enough to meet the challenges workers face. With the IFS calling workers’ pay growth prospects ‘dreadful’, tweaking here and tinkering there is no longer an option. We need to radically rewrite the rules in our country.
Something exceptional is happening to executive pay. It’s spiralling out of control after rising steeply over the last 30 years to the highest levels recorded. Pay at the top is roughly three times that of pay at the bottom, and none of the usual excuses – from globalisation to technological change – hold water.
Executive pay is up far more than wages to employees or returns to shareholders, and the reason lies in the continuing collapse of the usual checks on executive action. That needs to change.
Since the mid-1990s, public policy has encouraged remuneration committees to increase the proportion of executive pay that is performance-based. But, this link between pay and performance is broken. It’s a challenging time to be a business leader, confronted by unprecedented political volatility, a sluggish economy, and the short-termist judgements of the stock market.
Privately, many well-paid executives of big firms would agree that they wouldn’t do any better or worse a job if they were paid less than they are today. A number are embarrassed by the idea that they do a good job because of how or how much they are paid. We need to hear their voices.
The issue of excessive executive pay is part of a wider problem. Deciding pay is in the hands of remuneration committees composed of non-executive directors drawn from a narrow constituency. Regulating pay is in the hands of shareholders which increasingly are fixated on short-term returns. We need to diversify the membership of the remuneration committee and change the incentives of the shareholder.
Mrs May’s suggestions for binding shareholder votes on pay, forcing companies to put worker representatives onto their remuneration committees (which scrutinise executive and CEO pay), and the publication of pay ratios that show how much more executives get than average workers, is welcome. But, the PM could go further and I expect the consultation initiated by her green paper will hear the case for workers to have a bigger say over the earnings of their bosses.
Putting workers on boards
The TUC has rightly and consistently spoken up for workers to be brought into the boardroom and remuneration committees in private and public companies with 250 staff or more. If the PM’s reform is not to be tokenistic: workers’ representatives have to be a loud voice not a lone voice. A third of a company’s board, with a minimum of two worker directors, subject to the same duties as every other director on the board, would guard against such tokenism and ensure the boardroom hears about the impact of pay packages on the wider workforce.
A company’s remuneration committee could consider other approaches. Eliminating ‘performance-based pay’ (consisting of share options and profit based bonuses) and moving toward fixed salaries is one possibility. Some take the view that some kind of maximum pay ratio would be useful — say a limit of 100 times the pay of an average employee.
Others suggest that the incentive-related element of a remuneration package should fall to a lower part of the total remuneration package instead of dominating the total package.
Ideally we would see cultural change emerging from within the corporation. Cultural change brings about lasting change. But, boards cannot achieve this cultural change until they first change themselves. Putting workers’ representatives on remuneration committees and boards can help to change corporate culture in the longer term. But, so too can changing the incentives facing executives and CEOs today, starting with their unhealthy obsession with short-term shareholder value.
Shareholders increasingly tend to be short-term investors with an interest in selling shares for more than they bought them for then re-investing their profits where they can get the biggest returns. Increasingly, executives think their responsibility is to promote short-term shareholder value and serve the interests of investors with a painfully low interest in the long-term prosperity of the company.
Shareholders should be incentivised to retain shares in a corporation for a longer period. The level of reward could be linked to the length of time that shareholders retain their holdings. Shareholders would hold voting rights, including over CEO and executive pay, in relation to the amount of capital invested and the length of time for their investment.
Over time, we would bear witness to a growing proportion of long-term shareholders interested in the factors that sustain a company’s prosperity over the long-term. Such shareholders would find it difficult to justify to themselves or the company the enormous pay packages of some CEOs and executives.
Currently, a company’s shareholders have a binding vote every three years on the remuneration policies that set out the criteria for executive bonuses. However, the shareholders do not enjoy binding votes on individual pay packages, instead offering advisory views on an annual basis. Mrs May’s introduction of a binding annual vote on executive pay would be significant, if accompanied by other measures to lengthen the horizon of shareholders in bigger companies.
Inequality is neither inevitable nor irreversible. It’s a choice. Until we choose to rebalance the power of shareholders and jobholders, the pay gap between the top and the bottom will go on widening.
If the notion that you’re paid what you’re worth in the long-term is the organising principle of a meritocracy, we would be challenged to describe Britain as a full meritocracy. We can choose to change course and together rewrite the rules to broaden the gains from growth.
Tom Hayes is an Oxford City Councillor. Follow him on TwitterSign up to Left Foot Forward's weekday email for the latest progressive news and comment - and support campaigning journalism by making a donation today.