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On pay, business leaders are hidden in an ivory tower

29 September 2017 by Bernadette Barber

On pay, business leaders are hidden in an ivory tower - Read more

We must sort out pay to realise workforce potential, says Bernadette Barber.

Pay is always a sensitive subject, and one that encompasses many conspicuous issues, from executive remuneration policies and CEO pay ratios to minimum wages and gender pay gaps.

Where there are concerns about such things from an organisation’s stakeholders, including employees, investors and the wider community, you might expect companies to have shied away from practices for which they face criticism.

Yet, historically, the response to such pressures has often been seen as inadequate.

Longstanding censure of excessive executive pay has failed to rein in directors’ salaries and other benefits. Instead, they continue to escalate at rates that far exceed those enjoyed by less senior colleagues and ones which often bear little relation to growth in shareholder returns.

The delegation of remuneration matters to a committee of independent non-executives who must report to shareholders has been standard practice for more than 20 years, when executive remuneration concerns led to the reforms introduced by Sir Richard Greenbury’s Study Group on Directors’ Remuneration.

Greenbury also championed performance-related pay and alignment of directors’ interests with those of shareholders through the mechanism of share-based incentives.

Both of these principles have been refined over the years but have, nevertheless, endured. However, far from being resolved, anxiety over executive pay has, in many ways, become even more acute.

Disquiet over increasing pay gaps – those between average workers and the board as well as those between men and women – continues to grow.

The system is widely perceived to be unfair and frequently at odds with corporate values and ethics, which sound great on paper but appear to be ignored when it comes to setting pay at senior levels.

“The financial impact of paying high salaries comes not so much from the cost of those compensation packages, but the cost of dissatisfied employees”

Some believe the financial impact of paying high salaries to select individuals can only have a minor effect on profits, but those that hold that view have missed the bigger picture.

The overall impact comes not so much from the cost of those compensation packages in absolute financial terms, but the cost of dissatisfied employees.

UK productivity is stagnant and common sense tells us that this may be linked to short term and insecure contracts, a sense of being undervalued and a lack of investment in employee skills and work qualifications – with even some sizeable household names finding themselves ‘named and shamed’ for paying less than minimum wage.

Such factors can so easily combine to produce disengaged staff that are not sufficiently committed and motivated to go the extra mile. Firms need to do more to inspire loyalty, pride and enthusiasm in their workers if they want to release that untapped potential.

The remuneration committee’s remit is limited – generally covering only the remuneration awarded to the executive directors, company secretary and the senior management immediately below board level.

Although the remuneration committee has been under an obligation since Greenbury to ‘be sensitive to pay and employment conditions elsewhere in the group’, this requirement tends to be interpreted as merely a need for awareness.

There has been little suggestion until now that the remuneration committee should be responsible for influencing pay policy across the business.

Even so, the tone of the debate may be starting to change in this respect.

The recent government response to the 2016 green paper on corporate governance reform has stated that revisions to the UK Corporate Governance Code should examine how remuneration committees could be given more responsibility for showing alignment of pay and incentives right across their organisations.

Such a change, if implemented effectively, could extract executive pay from the ivory tower, where it often seems immune from the influences of the wider organisation’s pay policy.

Moreover, an end-to-end board-level approach to remuneration and employment conditions, combined with transparency over statistics that indicate the degree of fairness (or unfairness) with which pay is determined within an organisation – for example a CEO pay ratio and gender pay gap data – could bring welcome impetus for greater equality in the system.

More than 20 years after Greenbury, the time may have come to accept a tougher stance is needed if spiralling executive pay, often tenuously linked to outperformance, is to be brought under control and back within socially acceptable bounds.

Bernadette Barber FCIS is director of company secretarial consultancy, Chadwick Corporate Consulting

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