CIPD Voice: Issue 17
According to analysis by the CIPD and the High Pay Centre, a CEO at one of the UK’s largest publicly listed firms will typically have received enough pay within three days to match what it would take the average UK worker all year to earn.
The median full-time worker in the UK takes a year to earn a gross annual salary of £29,574, while the typical FTSE 100 CEO, on the median pay packet of £3.9 million, only needs to have worked until 1pm on Friday 4 January 2019 to have earned the same amount.
The £3.9 million figure was calculated by the CIPD and the High Pay Centre in their 2018 analysis of top pay and it marks an 11% increase on the £3.5 million figure reported in their 2017 review. Because of this pay hike, FTSE 100 CEOs, working an average 12-hour day, will only need to work for 29 hours in 2019 to earn the average worker’s annual salary, two hours fewer than they had to work in 2018.
If the increase in the pay for those at the top had been matched by a similar rise in employee pay, or UK productivity, or stock market performance, then it is unlikely that we would be questioning the rise in the earnings for Britain’s top bosses. However, the growth in CEO remuneration hasn’t been reflected in an improvement for either the UK economy or its workers. To make matters worse, executive remuneration has risen against a backdrop of various high-profile corporate scandals, such as mis-selling or mis-reporting, and lack of public trust in business leaders.
Regulators and policymakers have recognised the need to better align business practices with the interests of wider society. The Financial Reporting Council’s new Corporate Governance Code, in effect from 1 January 2019, asks boards to create a culture which aligns company strategy with purpose and values, and to assess how they preserve value over the long-term.
The Corporate Governance Code explicitly requires remuneration committees (RemCos) to review pay across the wider workforce. When setting executive pay, reasons must be given for why pay policies are appropriate using internal and external measures. In addition, remuneration committees must report on how executive remuneration aligns with wider company pay policy, and how they’ve explained this to the workforce.
The Government also now requires large UK listed firms to publish the pay ratio between their chief executives and their median UK employee. All this effectively means that RemCos need to reduce their reliance on external benchmarks when setting pay and instead focus more on organisation-specific measures of fairness and performance.
But a new report by the CIPD and High Pay Centre argues that RemCos, as they currently exist, are not fit to meet either these new requirements or determine CEO pay. The report, RemCo reform: governing successful organisations that benefit everyone, suggests that remuneration committees have too narrow a focus. As a result, it calls for company boards to re-model their remuneration committees to become new People and Culture Committees (PACCs).
These new committees would have a much wider remit than existing RemCos and would see them draw heavily on the expertise of the people profession. They would be responsible for ensuring that remuneration practices incentivise behaviours that are in the long-term interests of individuals, businesses and the societies they operate in, and that organisational culture more broadly reflects the company’s core purpose.
The report recommends that the new committees recruit their members from a broader range of backgrounds, including those with HR and people management expertise. The new committees’ responsibilities would include:
- Setting, monitoring and reviewing executive and board level pay packages.
- Executive level succession planning and capability development.
- Ensuring pay and benefits across the organisation are fair, proportionate and aligned with company purpose, guarding against rewards for failure.
- Governing organisational culture and workforce well-being.
- Ensuring that the behaviours and management styles needed to run a successful and sustainable business are rewarded and recognised.
HR teams will need to provide the committees with data and insights on organisational culture from sources including employee engagement surveys, employee advice lines, and disciplinary and grievance records. The PACCs will also be interested in progress on diversity and inclusion – both in terms of employee perceptions of inclusiveness but also in terms of tangible indicators such as gender and ethnicity pay gaps and the steps the organisation is taking to close them. Succession planning will also be high on the new committee’s agenda; they’ll need to see evidence that the right skills are being recruited and developed to ensure a solid pipeline of future leaders.
The CIPD believes that transparency on all these issues is key to ensuring that work is a force for good that benefits everyone, not just shareholders. While the report’s recommendations are aimed primarily at the boards of large, publicly listed companies, the principles are just as applicable to any large organisation.
Our recommendations may seem ambitious given the challenges HR teams often face in terms of influencing behaviours and decision making, but evidence shows that the appetite for change is there. According to the report, 'business leaders themselves recognise that their job satisfaction and public esteem derives from the workplaces and career opportunities that they create, rather than from the size of their pay package'.
Helping our members step up to the challenge – and opportunity – that this presents is a key priority for us. We are taking a two-pronged approach: on the one hand, fuelling demand for our# members’ expertise, by using reports like this to engage with investors and policy makers; while on the other, helping our members reach the highest standards of professionalism so they can meet the demands being placed upon them with confidence and integrity.
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.