It was Blaise Pascal who wrote in 1660 “I made this letter longer than usual because I lack the time to make it shorter.”
I felt this way when I was writing this blog. I wanted to write a short punchy piece on the alternative proposals to restrain executive pay but the more I looked into it the more proposals I found.
You can’t read a newspaper or turn on the television news these days without someone criticising executive pay. In a television interview with Andrew Marr David Cameron said it is wrong for executive pay "to keep going up and up and up" when the companies have not been very successful. He told Andrew Marr that such awards were "frankly ripping off the shareholders" (although he omitted to say that if executives got paid less maybe the employees could get more).
On 19th January he said in a speech that "popular capitalism" should allow "everyone to share in the success of the market" and criticised an "out of control" bonus culture in the City.
David Cameron said that the average pay of FTSE executives went up by four times between 1998 and 2010, and some executives had been rewarded highly despite a conspicuous lack of success and that some had even received high payments on failure or, seemingly, resignation or dismissal. Possible remedies suggested by him have been shareholder votes, employee representatives on the Remuneration Committee, more transparency on exec pay and publishing ratios of CEO pay to median or lowest paid employees
These suggestions will be formalised when Vince Cable publishes the government response to their consultation on executive pay this week.And in case anyone thinks that this is an issue being tackled just by the government, Ed Miliband has given his proposals to tackle high executive pay include increasing transparency by simplifying remuneration packages, proposing that companies should publish a pay ratio between the highest paid executive and the company median or average and the government could publish a league table highlighting the biggest pay gaps. Accountability could be promoted by putting an obligation on investors and pension fund managers to disclose how they vote on remuneration packages. And Labour also wants a repeat of the bank bonus tax - to increase "fairness”.
To put some facts on these arguments, figures in a recent a Business Department discussion paper stated that, "over the last 12 years employee earnings have grown 4.7% on average per year compared to 13.6% for FTSE100 chief executive officers". Or in another context, in the year up to April 2011 bosses' pay rose around 10 times as fast as most other people's pay.
Vicky Wright in her blog for PM Magazine does not think that any of these suggestions will work and that legislation is not the answer. John Cridland, director-general of the CBI, agrees that legislation is not the way to address the issue.
But Deborah Hargreaves of the High Pay Commission thinks that “Having an employee sit on the remuneration committee would help break open the closed shop and put some grit in the wheels”. I agree that this would be an interesting way to address the issue and disagree with those who say that the employee will not have all the information necessary to make the relevant judgements (it’s not beyond the wit of man to make sure they have it) and those who can’t see a way of electing the representative. Whichever way the employee representative is chosen it’s got to be more democratic and transparent than the existing process to choose the non-execs to sit on the remuneration committee!
But let me now look at this from a different perspective.
Nick Clegg wants to grow a “John Lewis” type economy with more employee share ownership.
A recent report from Roffey Park states that company directors have a “distorted” view of their success and reputation compared to less senior managers in their organisation. And this leadership institute’s latest Management Agenda report says that Board members are “out of touch” with lower ranks in their perception of how effectively change is managed.
“For the second year running, the Management Agenda findings suggest board directors are out of sync with the concerns and issues facing managers at all levels beneath them,” said Michael Jenkins, chief executive of Roffey Park.
“Their disproportionately positive views doubtless reflect their greater control over strategy and operations, but there is no excuse for senior leaders being out of touch with their people.”
And as we all know, companies must prove to employees that remuneration management for employees is robust and well managed, especially at the executive level.
So let me suggest an alternative approach to resolving the executive pay dilemma and the disconnect between executives and employees. Let’s amend the Companies Act to require listed companies to hold an AEM as well as an AGM. The Annual General Meeting is a chance for the owners, the shareholders, to meet with the Board, get their thinking on the business, question the Board and vote on important issues. How about making it a requirement that companies hold an Annual Employee Meeting, perhaps in each major location, say over 500 employees in one place? The CEO and Chairman would be required to explain the strategy, the business results, proposed investments and to make a detailed presentation on executive pay, the rational for it being at the level it is, the bonus, LTI and pension payments and the added value that the executives have brought to the company to justify the awards.
As well as having a moderating effect on executive remuneration, I’m sure that the communication and feedback on all aspects of the business would improve employee engagement.
Stop Press; I see in the Sunday newspapers that there is a further proposal, from the investors this time to limit the fees of remuneration consultants. This might be the most challenging proposal of all, especially given the change agenda above and even more so if it is included in the requirements for transparency!
This blog was written on 22 January and therefore before Vince Cable's announcement on 23 January 2012.
Interesting reading Clive.
I'm not sure that employee shareholding is the panacea described by Nick Clegg (after all, John Lewis is more of a co-operative then a free-float organisation).
Even when you have a high proportion of employee shareholders (and we have more than 200.000 around the world) it's disappointing that they rarely attend AGMs. Like all other shareholders they could stand up and put questions to senior management, including questions on senior exec pay. Like many shareholders I suspect they are passive co-travellers. The real challenge is to engage them and to be honest, in large organisations that is more about highly local matters rather than corporate strategy.
Like you and Blaise Pascal, I've written more than I intended so I'll stop here!
Thank you for the comment, Raymond. Like you I've worked in large companies where there have been many employee shareholders but they weren't willing to give up a day's holiday to attend the AGM, even if they were in the same country. But if the CEO had to visit them .......
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