By Cliff Weight, ShareSoc Director
My comments on this report of the Business, Energy and Industrial Strategy (BEIS) Parliamentary Committee, published 26 March 2019, are:
- This report very much endorses ShareSoc’s view that pay in FTSE 100 companies is too high, and probably most companies could recruit good executives for half the current rates of remuneration. We published our views in 2016 see ShareSoc’s remuneration guidelines see https://www.sharesoc.org/wp-content/uploads/2016/05/ShareSoc-Remuneration-Guidelines-Large-companies-2016.06.07-.pdf . We were ahead of the curve and it is good to see others now agreeing with us.
- The role and importance of the retail investor is not given sufficient weight.
- There is no mention of Shareholder Committees or Shareholder Panels as a potential solution to the executive pay problems.
- The impact of Private Equity is understated. The number of quoted companies is shrinking fast. Incentive schemes in Private Equity financed companies are more generous than in quoted companies. This report will more likely create more incentives for companies with good prospects to leave the market.
- The report proposes a cap on pay and in another part of the report references the new requirement to show the impact of share price increases of 50% on the potential remuneration payments. Persimmon’s share price increased by 500% between grant and exercise, not the 50% maximum these folk seem to think is the most that might occur. Persimmon was only the 3rd highest for TSR in the FTSE 100 over that period, not the highest. The Committee don’t seem to understand the way share prices move over the long term. Much of investors’ returns can occur from a few highly successful investments: there is a danger that those writing this report fail to understand this crucial point.
On the positive side, I am pleased to read in the report:
- FTSE 100 companies should be run by CEO’s who are stewards not superstars. The CEO role is complex and hugely difficult, but I agree the idea of needing superstar entrepreneurs for the FTSE 100 CEO role has certainly been overhyped.
- Fund managers have failed to restrain executive pay. It is their job to do so.
- Remuneration Committees have been weak in restraining executive pay. I have some sympathy with Remuneration Committees, as they have (until recently) been given so little support in doing this. The fund managers and their industry trade association, the inaptly named Investment Association, are hugely to blame in not supporting remuneration committees.
- The approach of naming and shaming the worst offenders. This includes the CEO, the Rem Com Chair and in some cases the remuneration consultant. NEDs worry about their reputation and want to avoid being criticised. The BEIS Committee approach is hugely helpful – it enables NEDs to say I cannot agree to that because it would attract negative publicity.
The BEIS website says the following:
- Read the summary
- Read the conclusions and recommendations
- Read the full report: Executive Rewards: paying for success
Huge differentials in bosses’ pay baked into pay system
Referencing “shaming” executive pay decisions such as those at Persimmon, Royal Mail and Unilever, the report says that “huge differentials” in bosses’ pay are “baked into the pay system”. A heavy reliance on “over-generous”, incentive-based executive pay, too often waved through by weak remuneration committees in the habit of designing ever more complicated pay packages, is at the root of excessive executive pay packages, say the BEIS Committee.
Move executive pay structures away from unpredictable and excessive bonuses
The report 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. The report calls for businesses to move executive pay structures away from unpredictable and excessive bonuses, with a greater element based on fixed basic salary plus deferred shares.
Committee calls for stronger link between executive and employee pay
To help tackle excessive pay awards and deliver fairer rewards across businesses, the BEIS Committee calls for a stronger link to be made between executive and employee pay, recommending businesses make greater use of profit-sharing schemes, and that companies are required to appoint at least one employee representative to their remuneration committee.
The report finds that the “say on pay” reforms introduced in 2014 have had some impact in curbing levels of new pay awards, which have remained fairly flat over the last decade.
The report criticises the “underpowered and passive” Financial Reporting Council and calls for the new regulator to be more robust and proactive in bearing down on excessive executive pay and willing to get tough with companies who fail to behave responsibly on CEO pay.
Rachel Reeves MP, Chair of the Business, Energy and Industrial Strategy Committee, said:
“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.”
“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? Getting workers on remuneration committees and including staff in profit-sharing schemes should be the first steps to this end. 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.
“Public scrutiny has often had more influence than investors or remuneration committees in getting companies to reverse outrageous executive pay decisions. The glare of publicity cannot be the only weapon in the armoury, but companies should be assured that the BEIS Committee will continue to shine a light on executive pay and hold businesses to account for their actions on CEO rewards”.
Absolute cap recommended on total renumeration for executives in any year
The report recommends that, as a matter of practice, and to reduce the risk of Persimmon-type awards and associated reputational damage, that remuneration committees should set, publish and explain an absolute cap on total remuneration for executives in any year.
On pensions, the report welcomes the Investment Association’s announcement in February 2019 that it will monitor and flag up any company that pay pension contributions to new directors in a way not aligned to the majority of the workforce and recommends that the new regulator seeks public explanations from any company that fails to deliver alignment on pensions contributions.
While welcoming the introduction of new requirements to publish pay ratios, the report recommends reporting requirements are expanded to include all employers with over 250 employees and that data on the lowest pay band be included alongside the quartile data required.