hen the High Pay Commission published its 12-point plan for bringing down executive pay last November, there were howls of protest from business that it would never work. The Commission, of which I was the chair, had worked hard to put together a package of proposals that should complement each other to be effective. But business leaders were quick to stress that any tampering with their pay packages would see them head off to Switzerland.
Ed Miliband was supportive of the proposals and acknowledged that if implemented together, they could achieve radical change. Labour subsequently adopted all 12 recommendations in full and urged the coalition to do the same. Chuka Umunna, shadow business secretary, called on the government to make a bold move in tackling excessive rewards at the top and has kept up the pressure on the coalition.
Vince Cable, Business Secretary, has recently announced his own reforms on top pay. He acknowledged the work of the High Pay Commission and said he was adopting the principles of 10 of the recommendations. This was slightly disingenuous given that the main substantive measure announced was a binding vote for shareholders on pay which we had not suggested!
Our core proposals for radical simplification of executives' pay packages, the election of a worker representative to companies' pay committees and a permanent body to monitor bosses' remuneration, were largely left untouched. The LibDems had been keen to pursue the idea of electing employees to companies' pay-setting committees, but this proved too controversial for the Tories.
David Cameron has mentioned the need to broaden membership of remuneration committees, but has suggested inviting academics and charity workers to sit on pay deliberations rather than workers. This is in spite of the fact that some Conservatives such as Matt Hancock and Dominic Raab, have written in favour of employee members on pay committees. However, business leaders are strongly against the thought of any member of the workforce having a say on their rewards and have effectively vetoed the idea.
Remuneration committees are supposed to decide executive pay whilst taking into account what is happening in the rest of the company, but they tend to pay lip service to this remit. A voice of common sense from an employee at the table could remind them of the pay freeze in place for the workforce, while they deliberate on a 50% increase for the boss.
Vince Cable says he wants to widen membership of boards by increasing the flow of non-executive directors from non-traditional sectors, this could feed through to pay committees. But it is not clear how this will be achieved. Corporate governance experts have been urging wider board membership for at least 15 years and so far it has not been forthcoming as directors tend to recruit in their own image – that of the white, middle-aged, male with a financial background.
One useful step in Cable's reform package is the requirement on companies to produce a single figure for what each executive will earn in any one year. Since executive packages consist typically of six or seven elements: base pay, annual bonus, long-term and medium-term incentive plans, pension or payment in lieu of pension, benefits and share options, a final figure is often very difficult to work out. The incentive plans pay out at different rates depending on performance targets and their value is hard to quantify.
If companies have to produce this one figure, it could be a step towards a broader simplification programme. We suggested executive packages be reduced to base salary plus one performance-related element at the discretion of the remuneration committee; preferably shares that are awarded over a long period of at least five years. Let's not forget that most bosses' base pay is in the region of £1m before you start with all the other incentives which add up to an average package of £4m.
The current system makes it too easy for executives to claim their incentives and bonuses. In 2010-11, 95% of FTSE 100 executives received their annual bonuses suggesting the bonus has almost become part of annual salary. It should be awarded for exceptional performance on top of the daily requirements of the job and not just be taken for granted.
Since our plan was published, some high-profile directors such as Stephen Hester at Royal Bank of Scotland and executives at Network Rail have waived their bonuses following public pressure. John Cridland, head of the CBI employers' group has warned that the bonus row is becoming a ‘witch hunt' against business. But that is because business appears to have misjudged the public mood and has failed to acknowledge the real economic pain being felt by most ordinary people in Britain.
It is disappointing to see no real leadership come from the business community itself. Our research found that huge pay disparities were harmful to businesses as well as the economy and society as a whole. Top bosses could take the initiative and take reforms into their own hands before they see something more radical imposed on them.