The Persimmon pay scandal shows it’s time to stop fat-cattery in the UK. Here’s how

Workers need the right to vote on executive pay

Jeff Fairbairn, the chief executive of house-builder Persimmon has finally been force out of his job after his £100m pay package came under public scrutiny.

His £100m was 3,195 times more than the lowest paid job at the company and, after a public backlash, he collected just £75m. Poor chap!

Fat cattery is deeply ingrained in company boardrooms. There are plenty of platitudes urging workers to take wage freezes but people at the top do nicely.

WPP chief executive Sir Martin Sorrell (now departed) received £48.1 million (which was lower than the previous year), equivalent to 1,718 times median earnings in the UK and 2,533 times the lowest paid job in his own company.  

Non-executive directors, usually friends of the executive directors, are supposedly there to ensure restraint but have utterly failed. Many of the non-execs are directors of other companies and the last thing they want is to reduce their friend’s pay because then that could become a benchmark for their own.

The government’s ‘naming and shaming’ policy on executive pay has not done anything. Even if shareholders vote down executive pay, the bosses still collect mega pay.

Around 37% of the shareholders voted against or abstained from approving executive remuneration, but AstraZeneca chief executive still received a remuneration package of £9.4 million.

At BT, 34.2% of shareholders voted against the executive pay, but its chief executive still pocketed £2.3 million, including a £1.3 million performance bonus, just weeks after axing 13,000 jobs.

At Royal Mail, 70% of shareholders rejected the executive remuneration policy but it made no difference to the amount collected by the board.

A different approach is needed not only to check executive pay also to secure equitable distribution of income. Labour has promised to put workers on company boards and this should be followed-up by giving workers the right to vote on executive pay as well.

Under this arrangement, no director would be able to walk away with mega pay packet whilst workers receive a few crumbs.

Consumer rip-offs are institutionalised in the finance, gas, water, electricity, railway and many other industries. There are plenty of platitudes about how companies listen to consumers. Let them vote on executive pay and show what they think of the bosses collecting mega bucks for rip-offs and poor service.

The voting on executive pay needs some teeth. Here is a suggestion. If 20% of stakeholders vote against remuneration policy or remuneration of any executive then all directors must receive a warning (a yellow-card). This should encourage reflections on executive pay packages and their alignment with the interests of stakeholders.

If, for the second consecutive year, 20% or more of the eligible stakeholders reject the remuneration report, a second warning (or a red-card) must be issued.

This would automatically trigger an additional resolution for the accompanying AGM. 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. The idea that a boss might lose their job would concentrate the minds.

Corporate elites have perpetuated a corrosive culture of bonuses at the top. They say that this a reward for increasing profits, or sales. Well, they can’t do it on their own and it is always a joint effort with employees.

Besides, it is the job of the executives to increase the long-term welfare of the company. Why are they paid bonuses for just doing their normal job?

Bonuses should only be paid for extraordinary performance and the culture of easy pickings can be squeezed out by a two part vote at the AGM.

The basic salary can paid with approval from a simple majority of voting stakeholders. The bonus element should have a higher threshold and require approval from 90% of all voting stakeholders. If stakeholders think the executive performance is so extraordinary they can award a bonus.

Company law need to be changed to force executives to return rewards which have not been earned by honest economic activity.  Any gains made by fraud, incidences of tax avoidance/evasion, wilful violation of fiduciary duties, deliberate mis-selling of products/services and publication of false or misleading accounts should be clawed-back.

Company law should be changed to give stakeholders the right to fix an upper limit i.e. ‘cap’ on executive remuneration package. This could be in the form of a multiple of pay ratio (e.g. x times the average wage), or an absolute limit (e.g. not exceeding a specified amount) or in any other form that stakeholders see fit. This simple right would empower stakeholders to check fat-cattery rather than passively voting on whatever directors put in front of them.

Corporate executives won’t be lining-up to support the above, but change is long overdue.

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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