Here are 10 steps to reverse inequality in the UK in 2018

Corporate pay at the top continues to skyrocket whilst average wages stagnate. Let's do something about it.

Inequitable distribution of income and wealth remains a recurring feature of UK life. Politicians huff and puff, but wealth continues to percolate upwards and fat cats continue to walk away with a disproportionate share of the wealth leaving crumbs for ordinary people.

Hedge fund manager Sir Chris Hohn paid himself £270 million, despite his Children’s Investment Fund making only £200 million in profit. The chief executive of online gambling firm Bet365 collected £217 million.

The boss of property developer Persimmon is to receive a bonus of £110 million. The most recent survey shows that the remuneration of executives of FTSE100 companies is 94 times more than that of the average employees.

At the other end of the scale, 2018 is unlikely to see any real growth in wages for average workers. If the minimum wage had grown in line with executive pay, it should be £26,000 a year compared with the current level of £14,664.

Of course, that has not happened. Workers’ share of the gross domestic product (GDP) now stands at 49.3% compared to 65.1% in 1976.

The government’s latest gimmick is a register to name and shame companies whose shareholders have protested over fat cattery. The register will achieve nothing because fat cats are beyond shame.

A more effective approach is to democratise corporations and introduce legally enforceable measures that link executive pay to the interests of employees and other long-term stakeholders. Here are some suggestions:

  1. The boards of large companies should be restructured to give significant representation to employees and stakeholders.
  1. In designing executive remuneration packages, company boards must give due regard to the interests of its employees, and corporate investment and capital needs.
  1. Employees and other stakeholders should vote on executive remuneration. For example, if employees and savers at a banks or customers of energy companies believe that directors have provided them efficient and effective service they can reward them with high pay, or penalise them for profiteering and poor wages and service.
  1. Executive remuneration contracts in large companies should be publicly available so that stakeholders can have more effective information about the basis and amount of remuneration.
  1. Following a referendum Switzerland introduced a law (Prohibited Compensation Payments under the Minder Ordinance (VegüV)) prohibiting the payment of golden handshakes and severance to directors of listed companies as they have no link with actual performance. The violation of this law is a criminal offence. The UK should do the same for large companies
  1. The government should restrict the amount of executive pay that can be treated as a tax deductible expense. This could be ten times the median pay. Therefore, companies engaging in fat-cattery would be liable to pay additional corporation tax.
  1. Executive remuneration should be in cash as rewards in share options and shares invite abuses and complicate the calculation. Directors have also been known to fiddle the dates of options. Shares and share options create temptations to use corporate resources to mount market support. Frequently, share buyback programmes use corporate resources to increase short-term returns to shareholders and price of share options held by corporate executives.
  1. Bonuses should only be paid for extraordinary performance and linked to a variety of long-term performance indicators.
  1. The Companies Act must provide a framework for claw back of executive remuneration for matters such as fraud, incidences of tax evasion, wilful violation of fiduciary duties, deliberate mis-selling of products/services, publication of false or misleading accounts and profit forecasts. The key idea is to force executives to return rewards which have not been earned by honest economic activity.
  1. Mechanisms for forcing boards to consider dissenting views should be introduced. Here a policy based on Australia’s Two-Strike Rule on executive remuneration can be developed.

It could require that if executive remuneration policies fail to secure approval from 25% of stakeholders then directors should receive a warning (a yellow-card). Following, the first yellow-card, the company’s next remuneration report must explain the Board’s response and the action taken to address stakeholder concerns.

If at the next AGM, 25% or more of the eligible stakeholders reject the remuneration report (the second yellow-card) then the meeting must also consider an additional resolution.

This resolution must consider whether the directors, with the exception of the managing director and/or chairman, need to stand for re-election.

If this resolution is supported by 50% or more of the eligible stakeholders then a meeting to consider re-election of directors must be convened i.e. directors face the possibility of being voted out for fat-cattery.

The above is not an exhaustive list and would not be welcomed by executives who for far too long and despite poor practices have grabbed an unfair share of wealth. The suggested framework empowers stakeholders and ensures that executive remuneration policies consider the interests of stakeholders.

Prem Sikka is Professor of Accounting at University of Sheffield and Emeritus Professor of Accounting at University of Essex. He tweets here.

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