On a day in Britain when it feels very much as if everything is broken, there is an important report out from the UK parliament’s business select committee that points to one step forward on repair: the critical need to join up the dots in the debate around the fundamental role of business in society. The Business, Energy and Industrial Strategy (BEIS) report, Executive Rewards: paying for success, calls for the country’s biggest companies to link the pay of those at the top with the rest of the workforce, bringing to an end “huge differentials in pay between those at the top and at the bottom” which “remain the norm”, and suggesting that they will be held to account if they do not.
“Executive greed, fed by a heavy reliance on incentive pay, has been baked in to the remuneration system. With that comes a public perception of institutional unfairness that, if not addressed, is liable to foment hostility, accentuate a sense of injustice and undermine social cohesion and support for the current economic model (Paragraph 10)” says the report in its conclusions and recommendations. It notes that over the last decade chief executives’ earnings in the FTSE 100 have increased four times as much as national average earnings.
FTSE 100 chief executives earn around £4 million per annum while average pay is under £30,000. Analysis last year showed that CEO median pay rose by 11% between 2016 and 2017, despite prominent criticism from the investor community and the Government over excessive CEO pay awards.Calling for a stronger link to be made between executive and employee pay, the select committee recommends that businesses make greater use of profit-sharing schemes, and that companies are required to appoint at least one employee representative to their remuneration committee.
“Eye-watering and unjustified CEO pay packages are corrosive of trust in business and threaten to undermine the public’s support for the way our economy operates. The roll-call of dishonourable executive pay decisions at firms including Persimmon, Unilever, Royal Mail, BT, Melrose and Foxtons, tell the all too familiar tale of corporate greed which is so damaging to the reputation of business in our country. But these examples also highlight the persistence of executive pay policies where far too little weight is given to delivering genuine long-term value, investing in the future, or ensuring rewards are shared with workers.” said Rachel Reeves,MP and Chair of the Committee.
“When the company does well, it is workers and not just the chief executive who should share the profits. Why should chief executives have a more generous pension scheme than those who work for them?” she asked. Getting workers on remuneration committees and including staff in profit-sharing schemes should be the first steps to this end, she said. “ Investors and remuneration committees have too often failed to rein in pay. When they fail, we need a regulator with the powers and mindset to step in and get tough on businesses who pay out exorbitant sums to their CEOs” she added.