Prof Prem Sikka: Executive pay is out of control. What do we do about it?

UK company executives have collected more in remuneration in over the first three working days of the year than the amount received by average worker during the whole year.

Despite decades of promises, successive UK governments have failed to shackle undeserved executive pay or secure an equitable distribution of income.  The latest evidence comes from the High Pay Centre.

UK company executives have collected more in remuneration in over the first three working days of the year than the amount received by average worker during the whole year.

In 2018, the average FTSE 100 CEO collected £3.46m, equivalent to £901.30 an hour. The average annual pay for a full-time worker was £29,559, equivalent to £14.37 an hour.

Top bosses collected 117 times the annual pay of the average worker. In 2018, 4.7 million employees were in low pay. The headline minimum wage rate for those aged 25 or over is £8.21 an hour and is due to rise to £8.74 an hour in April 2020. 

Business Secretary Andrea Leadsom said that the pay gap between corporate executives and workers is “concerning”, but offered virtually no policies for addressing it.

She deflected criticism by stating that from 2020 UK listed companies with more than 250 employees will need to disclose annually the ratio of their CEO’s pay to the median, lower quartile and upper quartile pay of their UK employees. 

The disclosures can enable discussion but will not secure any material change as the UK lacks effective institutional structures.

Policy failures

Within large companies, executive remuneration is decided by remuneration committees. These are populated by non-executive directors, often friends of the executive directors who are loathe to bite the hand that feeds them.

Some are executive directors of other companies. They have little/no interest in checking escalating executive pay as higher pay establishes new benchmarks for their own pay. This mutual back-scratching feeds the executive pay frenzy.

Thomas Cook and Carillion had remuneration committees. Despite poor corporate performance, executive pay escalated year after year. Carillion crashed with massive debts.

Its board presided over low levels of investment, declining cash flow, rising debt and a growing pension deficit. Yet the pay of directors rocketed.

Its three non-executive directors collected more than £60,000 each for working around one day a month and did not oppose any of the pay rises for directors.

The UK industry itself has acknowledged that the rising levels of executive pay have virtually no relationship with corporate performance.

Neoliberals cling on to the idea that somehow shareholders can check excessive executive even though they have shown little inclination to do so.

Shareholder approval for forward-looking executive remuneration policy is needed at least once every three years. There is no annual binding vote on the amount of executive pay. In any case, shareholders in large companies have only a short-term interest and are more focused on returns on their investment. 

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

Previously, the Conservative government supported the creation of Shareholder Committees to scrutinise remuneration and director appointments. In the face of opposition from corporate elites, it abandoned the proposal.

Reforms

The policy objective should not just be to check fat-cattery but also to create institutional structures which would enable employees to secure better distribution of income.

Unlike the UK, many European countries have employee elected directors on company boards and that encourages focus on the long-term wellbeing of the company as well as improved distribution of UK. The UK needs to do the same. 

Corporate wealth is generated by the brains, brawn, sweat and blood of employees. They have a vital interest in securing equitable distribution of income and company law should empower employees to vote on executive pay.

Employees are unlikely to award large salary and bonuses to executives whilst their own income is being squeezed and their pension schemes are left in deficit.

To enable stakeholders to exercise judgement, executive contracts at large companies need to be publicly available.

Many executives receive subsidised housing, chauffeur driven cars, the use of private jets, private healthcare, help with house buying and school fees, and these are often poorly accounted for.

The use of share options complicates calculation of the value of executive remuneration package and often understates it.

Company executives have also been known to fiddle share options by backdating them to maximise their own personal gain. Public sunlight is to only way to call them to account.

Executive pay is often inflated by golden hellos and goodbyes. They have no relationship with actual performance and should be prohibited, as is the case in Switzerland.

Many of the so-called executive bonus schemes have little/no substance. Bonus should only be awarded for extraordinary performance solely attributable to an executive. Such claims should require support from at least 90% of all voting stakeholders.

Company law should be changed to give stakeholders the right to fix an upper limit i.e. ‘cap’ executive remuneration package. This could be in the form of a multiple of pay, or an absolute limit or in any other form that stakeholders see fit.

Prem Sikka is professor of accounting at the University of Sheffield and emeritus professor of accounting at the University of Essex. He is a contributing editor to LFF and tweets here.

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5 Responses to “Prof Prem Sikka: Executive pay is out of control. What do we do about it?”

  1. Julia Gibb

    This article is spot on.

    Jeremy Corbyn is paid £138,000 a year. His millionaire wife owns a coffee plantation that exploits the poor by spending just £1 on wages for every £10 of coffee she sells. This failure has led Labour to its worst defeat since 1935 yet continues to receive colossal pay, more in a week than all the plantation workers are paid in a year.

    Then there is Nicola Sturgeon. She is paid £152,000 a year and has achieved the worst level of drug deaths in Europe, worse alcoholism than the rest of the UK and a soaring rate of syphilis.

    We Scots are pigeon-toed from booze, skag and the clap yet this incompetent rakes in THREE GRAND A WEEK from the english taxpayer.

    It’s a disgrace.

  2. nshgp

    14,000 bn in debt, the socialist welfare state pension debts, rising at 17.5% per year.
    So Prem, how are you going to pay your £550,000 share?
    How are you going to pay next years increase of £90,000?
    All Bernie Maddoff accounting for you

  3. msec

    What’s up ‘Prof’? Jealous that people who’s income is dictated by actual market forces rather than academic status are paid more than you? Awww

  4. Labour's Filthy Hospitals

    “The policy objective should not just be to check fat-cattery”

    And who’s going to decide what that is?

  5. Sam Pizzigati

    In the United States, where corporations have had to annually disclose their CEO-median worker pay ratio since 2017, the campaign against CEO pay excess is pushing to place consequences on those ratios, by denying government contracts to firms with wide gaps between executive and worker pay or taxing these firms at higher rates. This past November saw the introduction of new federal legislation along these lines: https://inequality.org/great-divide/putting-the-brakes-on-corporate-americas-inequality-engine/

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