Labour to halt bosses bonanza

Prem Sikka outlines his co-authored report on ending excessive executive payouts

Most social problems are rooted in the contemporary structure of institutions and the skewed distribution of power. The inequitable distribution of income and wealth is a good example of such a thesis. Company directors at the top collect large remuneration packages even for poor or mediocre performance, and the wages of the rest struggle to keep pace with prices.

According to the High Pay Centre the mean pay ratio between FTSE 100 CEOs and the mean pay package of their employees is 145:1. It is even higher in other companies. The chief executive of Bet365 picked up £220m plus £45m in dividends, a total of £265m. This is equivalent to £726,000 a day or 9,500 times the average UK wage. No amount of shareholder empowerment would have produced a different result because the CEO held 50% of the shares and her family and friends the remainder.

Inequalities matter because they have consequences for access to education, healthcare, housing, food, transport, pensions, security, life expectancy and ultimately social stability. The challenge is to develop policies that curb fat-cattery at the top and also secure improvement in the share of income/wealth of ordinary people.

A policy paper [pdf], of which I am a co-author, submitted to the Labour Party calls for changes to institutional structures and redistribution of power to secure more equitable distribution of income and wealth. It contains twenty recommendations. It recommends that employees and consumers, in addition to long term shareholders, should be empowered to vote on executive pay in large companies. Any director wanting more would have to think about employees’ welfare or otherwise s/he would have difficulty in securing approval of his/her own rewards. Similarly, the empowerment of consumers would mean that executives can’t easily get away with shoddy products, services and exploitation of consumers.

Here is a sample of some of the other policies.

The report recommends that if 20% or more of stakeholders reject executive remuneration policy and practice then the board should get a warning (a yellow card) which should encourage directors to rethink their practices

Executive remuneration contracts in large companies must be publicly available so that stakeholders can have more effective information about the basis and amount of remuneration which is often a complex package of basic salary, other payments and incentives. Bonuses have become a mechanism for inflating executive pay and should only be paid for extraordinary performance. Any bonus scheme available to executives must also be available to employees.

Pay differentials between executives and employees analysed by gender and ethnicity to be published.

Executive remuneration must be in cash as rewards in the form of share options, shares and perks invite abuses and complicate the calculation. Executives have been known to backdate options to maximise their gains. Frequently, excessive dividends and share buyback programmes use corporate resources to increase short-term returns to shareholders and the value of share options and shares held by directors. Such practices deplete resources for investment and are undesirable.

Golden hellos and goodbyes have all become a way of boosting executive remuneration and must be prohibited as they bear no relationship to actual performance.

Company law should be changed to give stakeholders the right to fix an upper limit. This could be in the form of a multiple of pay ratio, or an absolute limit, or in any other form that stakeholders see fit. The Companies Act must provide a framework for claw back of executive remuneration under specified circumstances. These could relate to matters such as fraud, tax evasion, wilful violation of fiduciary duties, deliberate mis-selling of products/services, publication of false or misleading accounts and profit forecasts.

The remuneration of each executive at a large company must be the subject of an annual binding vote by stakeholders, including shareholders, employees and consumers. The report recommends that if 20% or more of stakeholders reject executive remuneration policy and practice then the board should get a warning (a yellow card) which should encourage directors to rethink their practices. If in the following year, at least 20% of stakeholders again reject the policy and practice, the board should receive a red card. This should trigger an additional resolution for the accompanying AGM. This resolution must consider whether the entire board, with the exception of the managing director and/or chair, need to stand for re-election. If this resolution is supported by 50% or more of the eligible stakeholders then a meeting to consider re-election of directors must be convened in accordance with the requirements of the Companies Act 2006 or any new provisions that might need to be enacted.

The above proposals make company executives accountable to stakeholders and help to check fat-cattery and secure equitable distribution of income and wealth.

Prem Sikka

Prem Sikka is professor of accounting at the University of Sheffield and emeritus professor of accounting at the University of Essex