The scandal of executive pay means we need to democratise corporations

"We need to democratise corporations and have effective accountability embedded in law to secure equitable distribution of income."

Brits are facing hard times. For 2022 average pay rises for workers are expected to lag inflation by almost 8%, marking the biggest fall in real wages for 100 years. The rate of inflation, as measured by retail price index, has hit 12.3%. The average domestic energy bill has increased from £1,138 in September 2021 to £3,549 in October 2022.

However, there is no crisis for corporate elites. The median annual remuneration of FTSE100 CEOs has soared by 39% to £3.4m, equivalent to the average pay of 109 workers. FTSE 250 CEOs pay has soared by 38% to £1.72m.

Inequalities have severe implications for access to good housing, education, food, pension, healthcare, transport, justice, security and democratic institutions. Households on low income have shorter life expectancy, higher stress, infant mortality, health and psychological disorders. The elites are able to fund political parties and hire legislators to shape laws and public policy choices to prioritise their interests.

Voluntary codes of corporate governance, friendly non-executive directors and shareholders in large companies have failed to check undeserved executive pay or promote equitable distribution of income generated by brains and brawn of workers.

The plethora of executive pay disclosures in annual accounts has failed to check underserved executive pay, especially as the UK lacks an enforcer of company law. The naming and shaming of fat-cats has made little difference to executive pay.

We need to democratise corporations and have effective accountability embedded in law to secure equitable distribution of income.

The following changes are needed for the governance of large companies, as defined by the Companies Act 2006. Some 7,700 companies meet that definition.

  1. 33%-50% of the directors of large companies must be directly elected by employees.
  2. There must be an annual binding vote by stakeholders on executive pay.
  3. Company law should be changed to give stakeholders the right to fix an upper limit to executive remuneration. This could be in the form of a multiple of pay, or an absolute limit.
  4. Golden handshakes, hellos, handcuffs, parachutes and goodbyes have all become a way of boosting executive remuneration and must be prohibited.
  5. Executive remuneration contracts must be publicly available so that stakeholders can have more effective information about the basis and amount of remuneration which is often a complex package of basic salary, other payments and incentives.
  6. Executive remuneration must be in cash as rewards in share options and perks invite abuses and complicate the calculation. 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 the value of share options held by corporate executives. If share options are to be granted to directors, they must be offered to employees on the same terms.
  7. Employees must vote on executive pay. Employees are unlikely to approve mega pay rises for executives whilst they receive a few crumbs.
  8. Wherever possible consumers must also vote on executive pay. Customers of gas, electricity, banks, water, railways, insurance, care homes and many other companies can be identified with certainty. Subject to a qualifying criterion, such as customers for 12 months, they must be empowered to vote on director pay. This would check profiteering, exploitation and anti-social practices, such as water companies dumping raw sewage into rivers and care homes endangering lives of residents through neglect.
  9. If 20% of stakeholders vote against remuneration policy or remuneration of any executive then all directors must receive a warning. If for the second consecutive year, 20% or more of the stakeholders reject the remuneration report, a second warning must be issued. This would automatically trigger an additional resolution for the accompanying AGM to 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.
  10. Bonus payments to executives must be for extraordinary performance only and require extraordinary approval e.g. 90% of stakeholders must approve it.
  11. The annual report must publish the highest, lowest and median remuneration of all employees (after excluding director pay) on a full-time equivalent basis. This must be analysed by gender and ethnicity.
  12. There must be an upper limit on the tax deductibility of total executive remuneration for each member of the board, whether collected from a parent or any subsidiary company. This could be fixed at £500,000 per executive, or at any other amount, and the amounts exceeding that should not qualify for tax relief. This proposal penalises companies for engaging in inequitable distribution of income.
  13. The above must be enforced by a dedicated company law enforcer.
  14. There must be no local or central government contracts for any company, regardless of the size, that fails to meet the above requirements

The above list is by no means comprehensive but provides practical and enforceable steps for curbing undeserved executive pay, and helps to secure equitable distribution of income and create possibilities of enabling people to live fulfilling lives.

Prem Sikka is an Emeritus Professor of Accounting at the University of Essex and the University of Sheffield, a Labour member of the House of Lords, and Contributing Editor at Left Foot Forward.

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