CIPD Voice: Issue 10
Firstly, let’s look at the Conservative party manifesto. When it comes to corporate and executive pay, the manifesto proposals include:
- executive pay packages subject to strict annual votes by shareholders
- listed companies will have to publish the ratio of executive pay to broader UK workforce pay
- companies will have to explain their pay policies, particularly complex incentive schemes, better
- an examination of the use of share buybacks, with a view to ensuring these cannot be used artificially to hit performance targets and inflate executive pay
- listed companies will be required either to nominate a director from the workforce, create a formal employee advisory council or assign specific responsibility for employee representation to a designated non-executive director, so that employees’ interests are represented at board level
- a right to request information will be introduced relating to the future direction of the company, subject to sensible safeguards
What does the Labour party manifesto say about executive pay and governance? If in power it would:
- roll out maximum pay ratios of 20:1 in the public sector and in companies bidding for public contracts;
- amend the 2006 Companies Act so that directors owe a duty directly to employees, suppliers, the environment etc.
- legislate to reduce pay inequality by introducing an Excessive Pay Levy on companies with staff on very high pay.
Finally, the Liberal Democrat manifesto promises that if in government they would:
- strengthen worker participation in decision-making, including staff representation on remuneration committees, and the right for employees of a listed company to be represented on the board.
- change company law to permit a German-style two-tier board structure to include employees
- reform fiduciary duty and company purpose rules to ensure that other considerations, such as employee welfare, environmental standards, community benefit and ethical practice can be fully included in decisions made by directors and fund managers>
- require binding and public votes of board members on executive pay policies
What do we learn from this?
The Conservative manifesto is the only one to propose that listed companies will have to publish their executive pay ratio and the only one to say it will require firms to explain their pay policies better. Both the Conservatives and the Lib Dems promise to give more power to shareholders over executive pay, while the Lib Dems and Labour commit to reforming the 2006 companies act so that directors take into consideration a variety of stakeholders when making decisions.
Both Conservatives and the Lib Dems commit themselves to getting the views of employees on to the boards of listed firms and in the Lib Dems case also on the committee that determines executive reward. The Lib Dems are the only party to suggest a German-style two-tier board structure, while Labour is the only party to suggest a maximum pay ratios in the public sector or a levy on excessive pay.
What does the CIPD think about these proposals?
Broadly we are supportive, only by increasing transparency in business can we help to rebuild trust, and also give employees a greater voice in organisations. We therefore welcome the proposals around annual shareholder votes on pay packages, as well as the requirement to publish pay ratios. Only by shining a light on executive can we provide greater transparency for employees and shareholders, and ensure that executives are more accountable for their performance.
However, we do have issues with some of the proposals as they are a bit vague. For instance, the Conservative requirement for listed businesses to better explain their pay policies. But what does ‘better’ mean? In their communication, can we expect some firms to make more use of emojis and memes? Perhaps some of them could explain their approach through flash mobs or through interpretative dance?
The reason that many firms struggle at explaining their pay policies is because these pay policies are very complex, with multiple targets, deferred over varying time periods, and with certain amounts paid in cash and shares. The upshot is that while the size of these incentives are large, they don’t necessarily motivate executives and can alienate the rest of the workforce. If we simplify executive packages then we’ll be able to explain them better.
Similarly, the Conservatives suggest that the basis for the comparison of executive pay is the broader UK workforce. Shouldn’t the comparison be the organisation’s own workforce, rather than broader UK workforce pay, which risks firms being forced to publish numbers that give no context to their individual reward strategy? Or that executive pay packages should be subject to strict annual votes, what is meant by ‘strict’? Will they require super majorities rather than wining half of the votes cast?
The labour is proposing maximum pay ratios of 20:1 in the public sector, but how will they define ‘public’, ‘pay’ or ‘ratio’ (do the mean the mean or the median, will the pay ratio stretch from the top to the median paid employee or all the way to the lowest paid employee)? Get it wrong and you could end up creating as many problems as solving them. For instance, will we see some employers moving towards non-cash based remuneration? Will firms looking to bid for public sector contractors outsource some of their lower paid staff so as to reduce the ratio? The same point about unintended consequences also applies to the proposal to charge firms a levy that excessively reward their employees.
The Lib Dems want to strengthen worker participation in decision-making. Is this just about including staff representation on remuneration committees, and the right for employees of a listed company to be represented on the board, or are they open to other ideas? Similarly, how will staff representatives be appointed and supported, will they be paid and how long will they be expected to serve?
Hopefully, these issues will be resolved when the new government publishes its proposals in July and invites comments. The CIPD will be responding and we will be in touch to ask for your insights and suggestions. Hopefully, you’ll be around in August!
Charles Cotton, Research and Policy Adviser, Performance and Reward
Charles has recently led research into the business case for pensions, how front line managers make and communicate reward decisions, and managing reward risks, as well as the creation of a good practice guide on the annual pay review process. He is also responsible for the CIPD’s public policy work in the area of reward and is a Chartered Fellow of the CIPD.