Labour’s plan for stakeholder votes on boardroom high pay might just work
HPC Head of Policy and Research Ashley Walsh blogs on a new report commissioned by the Labour Party
Labour’s frontbench grabbed headlines earlier this week by considering plans to involve employees and customers at the UK’s 7,000 biggest firms in annual binding votes on boardroom pay.
This proposal could be as popular as it is original. To my knowledge, no advanced economy has tried ‘customer say on pay’. But, since the financial crisis in 2008, polling has consistently shown major public concern about undeserved executive salaries.
A pay bonanza among big bosses has come as the average worker’s salaries have stagnated. Following the weakest decade of growth since the 1870s, a typical FTSE 100 CEO will now take home up to 150 times the average wage. The International Labour Organisation (ILO) reported earlier this week that UK wage growth over the last decade has been the weakest among nine advanced countries.
Public outrage at Bet365 boss Denise Coates’ £265m in take-home pay this year – at a time when the number of problem gamblers among the 11-16s alone has risen to 55,000 – shows the UK firms have a problem on their hands.
But the problem is not just financial. It is a moral one.
The plans show that the UK’s current voluntary model of shareholder votes is not enough. Earlier in the summer, 70% of shareholders at Royal Mail voted against the firm’s remuneration report over the contractual entitlements of outgoing CEO Moya Greene and a 17% pay rise for incoming CEO Rico Back. But the vote was non-binding and there is little substantial evidence of shareholders radically changing executive pay packages.
In their 2017 manifesto, even the Conservatives pledged to force public companies to publish pay ratios and put boardroom pay packages to ‘strict’ annual votes, although Business Secretary Greg Clark watered these proposals down in August.
The Government have also introduced new rules requiring the biggest firms to publish boardroom pay in relation to the median salary for the entire workforce, but these disclosures will only begin in 2020, and will only cover publicly listed companies, not large privately-owned firms.
Ultimately, the success of the stakeholder-vote plan would turn on the extent to which UK consumers are willing to engage in complex remuneration reports and to follow consultations and annual general meetings at multiple major firms. But the extent of public concern about boardroom excess makes consumer activism a very exciting prospect.
But for public involvement to work, there would need to be much greater transparency in executive pay.
The report for Labour by Professor Prem Sikka at Sheffield University recommends forcing big firms – those with more than 250 staff – to publish the number of people earning over £150,000 per year, providing concrete evidence about the number of high earners. This would require companies to make remuneration contracts public.
Stakeholders will finally be able to realise how much high earners are costing firms, allowing a debate about whether this is the most optimum use of this resource, or whether it could be invested elsewhere - in research and development or pay increases for low- and middle-income employees, for example.
Plans to abolish all forms of share options, paying executives only in cash, would certainly make executive pay less complex and prevent unintended outcomes, such as the case of Jeff Fairburn the Persimmon CEO who trousered £75 million after his share awards rocketed in value, even though the increase had little to do with his own leadership. Banning ‘golden hellos’ and introducing fines for directors of companies that fail to pay the minimum wage would also help restore public trust.
UK directors have played fast and loose with their workers and consumers for too long. These proposals show the weakness of the moral and economic case for high executive pay. Labour have pledged tougher action and the polling shows that their proposals for fairer distribution enjoy popular support. Time is running out for UK corporations to show that the voluntary model works.
(this article initially appeared on Open Democracy)
Since 1 January 2019 the average FTSE 100 CEO has earned:
Income inequality in the UK
Wealth inequality in the UK
- Blog: Where is the ‘social’ wellbeing in ESG reporting?
HPC Head of Policy and Research, Ashley Walsh, blogs on the quality of workforce disclosures among FTSE 100 firms.
- Top Dogs and Fatcats: the debate on high pay
High Pay Centre essay featured in collection published by the Institute of Economic Affairs think tank
- HPC in the media: the myth of shareholder stewardship
Our analysis of shareholder voting patterns makes the case against a corporate governance system policed by dis-engaged investors