CIPD Voice: Issue 14

In March 2018, the Business, Energy and Industrial Strategy (BEIS) Select Committee launched an inquiry on executive pay and the gender-pay gap in the private sector.

On executive pay, the BEIS Select Committee inquiry examined the implementation of the Prime Minister's ambition to crack down on excessive executive pay. More specifically, the Select Committee looked at progress in simplifying the structure of executive reward and pay reporting, and the role of remuneration committees, institutional investors and shareholders in curbing excessive pay.

The inquiry followed up the previous BEIS Select Committee’s April 2017 report, which made a range of recommendations on corporate governance and executive remuneration. The inquiry asked for responses to the following questions:

  • What progress has been made on implementing the recommendations on executive remuneration by the previous Select Committee in its 2017 report on Corporate Governance?
  • What improvements have been made to reporting on executive pay in the last 12 months?
  • What steps have been taken by Remuneration Committees (RemCo) and institutional investors to combat excessive executive reward in the last 12 months
  • What further measures should be considered?

Commenting on the launch of the inquiry, Rachel Reeves, Chair of the BEIS Select Committee, said: "Excessive executive pay and gaps in gender pay are at root an issue of fairness. Pay awards for top bosses which vastly outstrip worker pay and which owe little to building genuine long-term value in a company are impossible to justify and damage the social contract between business and the public. Unjustified executive pay awards are the most corrosive influence on public trust in business and businesses must face up to their responsibilities and tackle this problem. If businesses don't step up on executive pay, Government will need to step in.”

The CIPD’s response is based on a provisional examination of those FTSE-100 firms that have so far published annual reports for their 2017 financial year and among those who put up their remuneration policies for triennial approval during this period.

This analysis follows the publication of our joint report with the High Pay Centre in August 2017 Executive pay: Review of FTSE 100 executive pay packages which focused on annual reports for the financial year ending in 2016. The analysis of the 2017 annual reports is expected to be published in August 2018.

Our provisional analysis reveals that so far very few FTSE-100 firms have linked either their short or long-term incentive plans to broader corporate responsibilities, and most are based on the achievements of financial targets. However, we have found examples of firms are reporting that they have been in discussions with their shareholders to try and make the measures used more stretching.

Among those firms revising their remuneration policy, some have disclosed that they have been in discussions with shareholders about how to simplify the way that CEOs are rewarded, for instance, reducing the number of different incentives.

We have come across examples of employers increasing the amount of shares that CEOs must hold in their firms and that timeframes of their long-term incentive plans (LTIPs) being increased to five years. The idea behind the increase is shareholding is to increase the alignment between CEOs and their shareholders, while the increase in time before the LTIPs pays out is to ensure that reward is better aligned to long-term performance.

As yet, we have seen no signs of a move away from the use of LTIPs towards deferred stock as suggested in last year’s report. As the BEIS Select Committee says, deferred stock option plans are where “a proportion of remuneration is given in shares. These shares can only be sold after set periods of time. Crucially, the number of shares is not dependent on performance targets; instead a specified number is allocated as part of the remuneration package and their value is determined by share price at the time of vesting”.

When it comes to short-term incentives, we have seen little sign among our sample of a decline in their use, if there have been changes it has been in the lowering of the maximum awards payable. Few have introduced wider non-financial objectives, such as employee turnover.

In terms of governance, we have not come across any employers among our sample of FTSE 100 firms that have appointed an employee representative to the remuneration committee.

When it comes to reporting, few remuneration committee reports refer to the contribution of the whole workforce in the success of their organisation and how this success is shared with them. From a people perspective, the CIPD would have liked to see more of an acknowledgement of the role of the workforce in the achievements of the organisation, often the reports suggest that it is largely down to a few individuals at the top who should be rewarded accordingly.

Our new report Hidden Figures: How Workforce data is missing from corporate reports reveals that many big firms are still failing to capture and disclose key workforce data. This means the assessment of company success is partial at best, resulting in executive reward decisions based on only an incomplete picture of what is making the firm tick.

We have come across eight FTSE 100 employers who have reported on their CEO pay ratio. However, how they have done differs, with some reporting on all of their workers and some using just their UK staff as the basis, some use the mean, others the median. It should be noted that no regulations have so far been published about what firms should publish and how.

In terms of what has happened since the BEIS report came out, the 10 largest drops in FTSE 100 remuneration range from 34% to 75%. By contrast, the 10 highest increases in FTSE 100 pay range from 91% to 2,117%. While we’ve not done all the analysis for our report, these figures suggest that the typical FTSE pay package has increased in the financial year ending 2017, a time when wages for most employees fell in real terms.

Charles Cotton

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.