The accumulation of wealth by means of employment has more become appreciably more difficult in the past decade and this is disproportionately true for those working for listed companies. As is so often the case with change, we glimpse the coming landscape from afar but do not fully comprehend what has passed us by until we see it in the rear-view mirror.
On most every front, it seems that the ability of executives to accumulate wealth through employment is under attack and the four horseman of the executive remuneration apocalypse bear the following names:
Higher tax rates
Turning the clock back a quarter of a century, the highest marginal rate of income tax was 60% versus 50% in 2010. However, employee national insurance contributions were 7% and capped, compared to today’s 11% plus 1% surcharge; there was no capital limit on the amount that could be accumulated via a pension scheme and; gains on share options were exempt from income tax on awards with a face value of up to 4 x taxable employment income.
Share based remuneration
Data published by the Office for National Statistics in June 2010 reveals the dramatic decline of discretionary (capital gains tax bearing) share based incentives, with 40,000 employees receiving an award in the last tax year compared to 415,000 in 2000/01. During the same decade, all employee share schemes have been flat lining, with 1,370 in operation during 2009 compared to 1,320 in 2001.
The one exception to the general decline in share based remuneration is within the SME sector, where companies with a market capitalisation of less than £30m can deploy the Enterprise Management Incentive and achieve a capital gains tax rate of 10%. For these plans their numbers have increased fourfold, from 2,400 schemes in 2002 to over 10,000 today.
Before dismissing SME data as irrelevant to the labour market, it is sobering to be reminded that 59.4% of the working population is employed in companies with fewer than 250 staff.
Defined benefit pension schemes
Substituting a defined benefit (DB) scheme with a 10% of salary defined contribution plan, will simply not replicate the scale of capital accumulation achieved by past generations of DB schemes. Few schemes remain open to new entrants and the rate of cessation of future service accrual is speeding dramatically, as disclosed by the findings of recent Hewitt research
The obvious implication for currently employed executives is that they will not realise the amount of capital at retirement that they might have reasonably expected when they commenced their working lives.
Increased regulation
Existing corporate governance requirements and the increasing influence of the regulator on financial services firms’ remuneration models continue to narrow the range of innovation, forcing ever more companies into a compliance-led straightjacket. The onset of the Solvency II regulations will impact a much greater number of financial services firms, with the FSA itself estimating that its updated Remuneration Code will bring over 2,500 firms into the regulatory framework. Not only is this a harbinger for a rapid increase in the number of deferred bonus plans to be offered to financial services employees, but it will inevitably reduce amounts transferred into the hands of senior employees.
Armageddon or New Jerusalem?
Looking into the near-term future, it would be naively optimistic to believe that there will be any turn in the tide of ever increasing regulation of short and long-term incentives or a volte-face in the limitation of tax-favoured retirement savings. Added to this, the Chief Secretary to the Treasury stated in his Observer interview this past Sunday that “he could see no reduction in the tax burden during the life of this parliament.” Where then does the potential for employment led capital accumulation arise?
Will we see a flight to smaller boutique employment opportunities where tax favoured share incentives are more compelling; where regulation is lighter touch and the challenge and freedom to act more engaging? Logic would suggest this course, especially given that the pension playing field has been levelled by the demise of attractive DB pensions in large corporations. Certainly some are suggesting that “boutique terrorism” is the next chapter in the war for talent.
Alternatively, will self-employment be the answer? Many see contracting as a route to superior earnings and the means to tax plan employment income more effectively. However, many of these sole traders appear to be “necessity entrepreneurs” with research from the ACCA indicating that the supposed trade-off between lower short-term income and long-term capital accumulation often just resulting in a lower level of long-term income.
Given our responsibility as reward practitioners to ensure we create business led routes to capital accumulation this is a question we can ill afford to ignore.
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