Executive pay: It's time for some enlightened self-interest from business

Theresa May's proposals represent cautious progress, but High Pay Centre director Stefan Stern is optimistic.

by Stefan Stern
Last Updated: 30 Nov 2016

After a year of terrible news it is perhaps not unreasonable to be grateful for small mercies. The government’s green paper on corporate governance reform, published on Tuesday, represents progress, albeit of a rather careful kind.

A first speedy reading of the document reveals nothing terribly radical and nothing all that unexpected. Big shareholders may have to pass a binding vote every year rather than once every three years to approve executive pay. Pay ratios could – should – be published. And remuneration committees may have to "engage more effectively" with shareholder and employee views before setting pay levels – whatever that means.

This is a green, not a white, paper. It is a consultation document. The government may choose to change absolutely nothing whatsoever. That would be a hard sell politically, of course. I think that most if not all of the changes described above will happen. These are not scary steps and businesses should be able to handle them.

The vaguest one – on remuneration committees (RemCos) – leaves the greatest room for disappointment. It is the proximity of the employee in the room that would raise the quality of the RemCo discussion. If BP had had a couple of guys off the rig in the room when discussing Bob Dudley’s proposed pay package they would have been less surprised by the ultimate shareholder (and public) reaction to it – a 60% vote against.

Pay ratios are a simple measure, yes open to malicious misinterpretation, but actually useful in practice. The average 12 year old might be able to understand why the Goldman Sachs pay ratio is tighter than the one at Tesco. This is hardly a killer debating point. But as to whether the comparison between Tesco and Sainsbury is helpful and interesting – well, duh, as our average 12 year old might add. Ratios will put pressure on boards to think a bit harder: how will this look to our colleagues at all levels and to the world outside? This question matters.

Looking to shareholders to rescue us from the morass of executive greed is wishful thinking. Some big shareholders – Hermes, Legal & General, Aberdeen, Royal London – have been speaking up constructively in recent weeks. They have used their votes more purposefully than other institutions have in the past. This, too, is progress.

But many big shareholders are compromised. They follow so many companies that they cannot possibly grasp all the fine details of these businesses with the resources at their disposal. And they sometimes have very highly paid CEOs themselves. A single CEO pay package does not represent a significant number to them when compared with the flow of dividends and the rise in the share price that they seek. They use proxy firms such as ISS to check out the governance of the businesses they are invested in. Companies end up feeling 'ownerless'. This is bad news for everybody.

Our problems over inadequate governance and excessive pay are systemic. It is not any one individual participant’s fault. Everyone has to change their thinking and raise their game: RemCos, shareholders, pay consultants, headhunters, executives themselves. Restraint would help – the sort of restraint CEOs urge on their colleagues the rest of the time. The important skill of managing costs should be directed at top pay packages as well.

Still, my glass is half full on this one, not half empty. One of the first press conferences I went to as a teenage scribbler was the 1992 launch of Sir Adrian Cadbury’s report into 'financial aspects of corporate governance'. Twenty-five years later we are still struggling with corporate governance reform. Inertia has ruled the day.

We have waited a long time, too, to witness an outbreak of enlightened self-interest in the corporate sector. This could be the moment when we finally get to see some. It’s been a long, long time coming, but I know – at least I think I know – a change is gonna come.

Stefan Stern is director of the High Pay Centre and former MT features editor

Image credit: 401(K) 2012/Flickr


Find this article useful?

Get more great articles like this in your inbox every lunchtime

Don't baulk at hiring pregnant women

Vida Consultancy founder Rachel MacLynn says a few months of leave is a blink of...

Howard Davies: The government ought to focus on productivity

NatWest Group's chairman ponders productivity, unemployment and income inequality.

A farewell from MT's editor

It's been a pleasure.

6 ways to stay close to your customer

It’s time for firms to switch from short-term survival tactics to serving their customers' post-pandemic...

"Being strategic" doesn't mean you can neglect basic people management

The leader that made me: There’s value in walking the floor, says Hermes UK CEO...

How to stop your staff exodus

Conventional approaches to retention may be insufficient during the 'Great Resignation'.