Shadow Chancellor John McDonnell has proposed a policy calling for customers of the UK’s 7,000 or so large companies to be given the chance to influence the ways that executives are remunerated - as part of a two stage "annual binding vote by stakeholders including shareholders, employees and consumers".
Executives can get a hard rep and it's become far too common for business leaders to be tarnished with the brush of greed for the "excessive bonuses" and "bulging" paychecks they receive. But these reports are often taken out of context.
That's not to say that there isn't a problem with executive pay, but it largely lies in the way that remuneration processes are structured based on long-term, performance-based incentives. Persimmons is perhaps the most notable recent example. Jeff Fairburn’s much maligned £75 million bonus was the result of a long-term incentive plan: the problem lies in the way the reward is structured, not the person taking it.
We’re not criticising the sentiment at the heart of McDonnell’s proposal. Greater transparency in the remuneration process by requiring the publication of demographic pay differentials could increase society’s trust in business. Likewise we shouldn’t dismiss the idea of company fines and remuneration reductions for executives of large organisations that fail to pay staff the legal minimum wage.
It’s a good sentiment but ultimately it is utterly unworkable, largely because it would potentially lead to some bizarre incentives. As an example, would it be right for Walmart - a customer - to dictate pay for the farmers from which it buys its milk? The customer’s best interest is usually in lower prices, so does a CEO who doesn't lower her prices run the risk of being paid less?
The consumer already has the market power, in any case - if they really don’t like how a company pays its CEO, they can vote with their feet. They don’t need to be given a seat at the table.
Executive pay is an issue that needs to be addressed, but it needs to be handled with great care. It’s right that the interests of all stakeholders are considered in the process but the proposed policies risk inadvertently creating burdens that could seriously undermine our competitiveness, which ultimately would be good for no one.
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