Good governance and fair reward
We call on the Government to set out the key principles underpinning responsible business practice and, working in partnership with employers and other key stakeholders, to champion efforts to raise levels of transparency, trust and fairness in organisations and workplaces.
- Require the Financial Reporting Council to conduct an annual review of publicly listed firms’ compliance with the UK Corporate Governance Code to increase its effectiveness.
- Support the establishment of voluntary workforce reporting standards to encourage more organisations to provide better information on how they invest in, manage and develop their workforce for the long term.
- Require publicly listed companies to establish a formal 'people and culture' committee in place of their remuneration committee (RemCo), or at least broaden the remit of their RemCo, to consider issues such as organisation culture, fairness and wider workforce reward policies.
- Extend single-figure reporting requirements to cover key management personnel and pay for the top 1% of earners, to further improve transparency and ensure this area of reporting practice improves.
- Restore the full independence of the Low Pay Commission (LPC) so future rises in the National Living Wage are based on the judgements of the social partners and not politicians; widen the LPC’s remit to look at underlying causes of and solutions to low pay as part of a modernised industrial policy which seeks to raise productivity in all sectors of the economy.
Poor corporate governance and frequently excessive levels of executive pay relative to the rewards of the wider workforce are undermining both trust in business and organisational performance.
According to the 2019 Edelman Trust Barometer, more than half of the UK's public say business today is 'not good' for society, while 62% say addressing the high pay and bonuses given to senior management and business leaders was either 'important' or 'very important'. It is perhaps not surprising that people feel this way, considering that the share of total incomes going to the top 1% and 0.1% of UK earners is on the increase, and the median FTSE 100 CEO reward package stands at 117 times higher than the average worker.
In addition, there have been a range of high-profile corporate governance scandals that have hit the headlines in recent years on issues such as executives being rewarded for failure, sexual harassment, poor working practices and inadequate patient care, to name a few. At the heart of all these there has been a failure by boards and senior management teams to recognise the importance of critical people issues such as culture, fairness, diversity and inclusion, and investment in workforce skills and capability.
The long-standing fall in investment in training, poor productivity growth and a lack of workforce diversity, particularly at senior levels, are further signals many organisations are failing to adequately value their people and how they are managed and developed in their approach to governance.
Increasing transparency and fairness
A core factor that connects these issues is that too many organisations are run with a singular focus on narrow short-term financial objectives and satisfying shareholders, which means they undervalue their human capital – the people skills and knowledge that creates long-term business success. This is partly because not enough organisations have the necessary workforce data to enable them to highlight why greater investment in the workforce is so critical and to identify and tackle problems around culture, workplace conflict, lack of diversity or employee well-being and development. In addition, not enough organisations publicly report on this type of information externally to provide greater transparency for all external stakeholders, including investors as well as regulators.
Improving the quality of workforce data analysis and reporting, both internally within organisations and externally to stakeholders such as investors, can highlight the value of greater investment in the people management practices that underpin healthy and productive organisations.
Tackling excessive executive pay
Another way to ensure that organisations place more emphasis on fair reward practices and wider people issues such as culture, behaviour and diversity in their approach to governance is through reform of the remuneration committee (RemCo).
The CIPD’s research with the High Pay Centre suggests that currently RemCos are part of the problem, as they set CEO pay without reference to the organisational context and these broader people issues. To address this, RemCos should be replaced by people and culture committees, or at least be required to have a wider remit, to ensure executive reward levels take account of the rewards of the wider workforce, as well as issues such as culture, diversity, and training and development.
We also believe that to further improve transparency, there needs to be enhanced mandatory disclosure of the pay of senior executives beyond just the pay of CEOs to include key management personnel and the pay of the top 1% of earners.
Reforming the role of the Low Pay Commission
As well as addressing the issue of pay at the top, there remain significant challenges with pay at the bottom. The rise of the National Living Wage (NLW) has ensured that those at the bottom of the labour market have seen their real wages protected, although at the cost of reduced differentials for some earning just above the NLW.
However, the politicisation of the NLW is a cause for concern, with political parties competing over the future level of the NLW with little regard for the impact on jobs, differentials or competitiveness. Trying to address low pay just through setting ever higher minimum wages does not deal with the root cause of the problem, which is low productivity across the low-pay sectors. Consequently, the independence of the Low Pay Commission should be re-established and it should be given a wider remit to look at the underlying causes of and solutions to low pay as part of a modernised industrial policy that seeks to raise productivity in all sectors of the economy.