Executive pay: giving workers a say

By Mike Emmott, Employee Relations Adviser, CIPD, @emmott_m

 

It shouldn’t be too long before we know the outcome of the election.  Whatever its impact in other areas, it’s likely to have a significant influence on the direction of employment law. 

 

The Labour election Manifesto says the Party will “make sure employees have a voice when executive pay is set by requiring employee representation on remuneration committees”.  The Liberal Democrat Manifesto similarly promises to consult on consulting staff on executive pay.  Assuming at least one of them is in a position to deliver on their pledge after the general election, what does this mean and what impact would it have? 

 

Concerns about high pay for directors have been expressed over many years as the disparity between pay at the top and the bottom of the pay hierarchy has escalated.  Fifty years ago, the CEO of a large company might expect to be paid perhaps seven times what a directly employed cleaner in the same organisation was paid.  Now the average differential in FTSE 100 companies is reported to be more than 250 to one.  The impact on employee engagement is not known but is unlikely to be positive. 

 

Remuneration committees in listed companies have responsibility for recommending or setting remuneration, including pension rights, for executive directors and senior management. Their job is to set pay at levels that will attract and retain good people.  The committees are made up of senior managers, possibly the company chairman and one or more consultants.  How would an employee representative get on in such company and what contribution could he or she make?  

 

The job of remuneration committees is constrained by the need for executive reward to remain competitive with that in other companies, both in the UK and across the world.  Too much weight should not be placed on the risk that UK-based managers will opt to transport themselves and their families thousands of miles, simply in order to benefit from higher salaries in other countries.  There are obviously significant incentives for highly-paid people to live and work in the UK, in terms of security, lifestyle, children’s education and so on.  Nevertheless reward is clearly an important factor in the ability of UK-based organisations to recruit and retain the best people. 

 

It would be wrong to expect any dramatic impact from Labour’s manifesto proposal on levels of executive pay across the economy, certainly not in the short or medium term.  When an inquiry into the world of work set up by the Smith Institute and chaired by Ed Sweeney looked at the issue of workers on boards last year, they found that not all union representatives seemed convinced it would help. Those unions organising in previously nationalised industries, for example, pointed out that a sprinkling of worker directors made little difference to the boardroom conversation. 

 

This wouldn’t be the first attempt in the UK to deal with executive pay.  Major investors have sought to use their voting strength at annual general meetings to influence decisions on boardroom pay.  Although they have been successful in tackling one or two egregious cases, their influence on the general level of executive pay has been limited. 

 

Could appointing individual employees to remuneration committees expect to have a bigger impact?  One reason to hope that they could exercise some positive influence lies in the different focus and objective such appointments would have, compared with investors.  Shareholders are looking for value for money and tend to look at reward issues in relation to the performance of the company: they are generally happy to see high pay for senior managers provided it’s linked to high performance.  Employees on the other hand would naturally seek to focus more on the impact of high levels of executive pay on the sense of fairness and trust across the organisation. 

 

One positive effect of including employees on remuneration committees would likely be to place the issue of both high and low pay higher up employers’ agenda.  It’s the differential between the two that attracts most attention from both trade unions and public opinion generally.  Lifting pay at the bottom would obviously help to reduce the differential with top pay. 

 

However, it would probably not reduce the differential by much.  If more companies decided to pay the living wage, for example, this would barely touch the multiple between their highest and lowest paid employees.  And many of those benefitting from an uplift to the living wage would actually be employed by contractors so their pay would not be reflected in comparisons inside the company.  

 

Trade unions will welcome the Manifesto promise as a step in the direction of greater workplace fairness.  However the extent to which it might increase their influence will depend on the way any legislation is drafted.  Some large companies don’t recognise trade unions and it can hardly be expected that they would be required to appoint union representatives to remuneration committees.  Following the pattern of existing legislation on consultation on collective redundancies, we might expect that, where an employer recognises a trade union, it would be expected to invite the union to come up with a nomination. 

 

Employers’ attitudes are likely to be influenced by the role of trade unions, and by any additional management costs required to support larger remuneration committees.  Initial comments by employer bodies have been quite measured.  Some have suggested that an employee representative might not be able to add anything meaningful as they are not part of wider board discussions.  However discussion in remuneration committees seems likely to focus at least as much on external comparisons.   HR professionals might welcome the move as a modest but not unhelpful contribution to reinforcing employee voice.  Provided it is properly managed, the impact on employee engagement should be positive. 

 

But the main beneficiary of appointing employees to remuneration committees would probably be an incoming left-leaning government.  Relationships between Labour and the trade unions have for some time been affected by uncertainties about how far the party is willing to push specific union objectives, for example strengthening the regulations on employee information and consultation.   The limited reform now proposed represents a modest move in the direction of greater industrial democracy, but one that is unlikely to cause serious alarm by employers. 

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