The headlines bury the real story about bosses' earnings during the pandemic, writes Prof Prem Sikka.

Every day we hear of new wage cuts for ordinary workers. That isn’t so at the other end of the wage scale.

Before the coronavirus pandemic, top bosses collected 120 times the annual pay of the average worker. In just the first three working days of 2020, they bagged more than what most people earn in a year.

At Ocado, the CEO collected 1,935-times the £24,907 median annual salary of a full-time UK worker. Despite taking business rates holidays, pay for furloughed staff, government-backed loans, companies have not restructured their executive pay-to-worker pay relationship.

The High Pay Centre examined a sample of 36 FTSE100 companies’ CEO pay and noted that 14 had reduced the basic salary by up to 20%. Two companies deferred the salary increases. But that isn’t the full story: bonuses dwarf basic pay.

Eleven companies cancelled the short-term incentive plans for CEOs, but none reduced the long-term incentive plans and bonuses, which can add up to more than 50% of a CEO’s remuneration package.

Fat-cattery flourishes because there are no effective no mechanisms for checking it. Corporate remuneration committees overseeing executive pay are stuffed with cronies. Consultants advise on executive pay and dutifully recommend escalation because otherwise they would not be hired again.

The government policy of leaving it all to shareholders has failed. With an average US shareholding duration at large listed companies of just 22 seconds (yes, you read that right), most shareholders have little long-term interest in corporate governance.

Even if some die-hards vote against executive pay, their vote is advisory rather than binding. Directors at large companies can cast thousands of proxy votes to get their way.

The challenge is not only to curb excessive undeserved pay at the top but also to secure an equitable distribution of income. That requires democratisation of corporations and empowerment of stakeholders with a long-term interest in companies. Here are some easily implementable reforms.

1. The carefully selected snippets in annual financial reports do not provide adequate details of the executive remuneration package and conceal things like the provision of private jets chauffeur-driven cars, holiday villas and schools fees. The best way of dealing with it is to require that executive remuneration contracts in large companies must be publicly available so that stakeholders can have effective information about the basis and amount of remuneration

2. Remember how Carillion left a huge deficit on its pension scheme, neglected investment and fed a frenzy of dividends and executive pay rises by borrowing money? This destroyed the company. Large companies must have worker elected directors on their boards, to shape pay policy. Employees must vote on executive pay.

3. In fixing executive remuneration packages, a company must demonstrate that it has given due regard to the interests of its employees and consumers, and its investment and capital needs.

4. The cult of bonus payments to executives needs to be discouraged. Building sustainable companies through higher sales, investment, research and development, job creation, customer satisfaction, good relationship with suppliers and control of pollution is all part of good management practice and helps to demonstrate that directors have performed their duties with reasonable care, skill and diligence (Section 174, Companies Act 2006). The performance of normal duties should not attract any additional rewards. Bonuses, if any, are only to be paid for carefully specified and extraordinary performance and must relate to the long-term success of the company.

5. The remuneration of each executive at large company must be the subject of an annual binding vote by stakeholders, including shareholders and employees.

6. Company law permits companies operate a delegated proxy voting system, which is forbidden for trade unions. This enables named directors to cast thousands of votes and change the outcome of pay resolutions. This must be ended.

7. Votes on executive remuneration must be in two parts. (a) The basic remuneration of each executive can be the subject of a simple majority vote by all stakeholders. At least, 50% turnover should be needed; (b) the bonuses for assumed extraordinary performance should require extraordinary scrutiny and require approval from 90% of stakeholders.

8. We need enforcement which has teeth. 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.

9. If for the second consecutive year, 20% or more of the 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 all 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 in accordance with the requirements of the Companies Act 2006 or any new provisions that might need to be enacted.

The above may not eliminate the selfish tendencies of all fat-cats. But it will go some way towards checking their worst excesses.

Prem Sikka is Professor of Accounting at University of Sheffield and Emeritus Professor of Accounting at University of Essex. He is a Contributing Editor to LFF and tweets here.

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