Deborah Hargreaves’ Monday View for the Daily Mail on why shareholders do not hold companies to account on remuneration
When Britain’s highest paid executive takes home more than an ordinary person could earn in 600 years, it is small wonder that inequality is growing in the UK at one of the fastest rates in the developed world.
A rising stock market, swollen by £375billion of QE money created by the Bank of England, is pushing up directors’ equity-based bonuses and incentive plans sharply, because it inflates the value of assets, including company shares.
FTSE 100 chief executive pay reached an average of £4.3million last year or 160 times average wages. Those packages have quadrupled in the past 10 years when no-one else has had a real-terms pay increase. Workforce real wages are now at the same level as they were in 2003, according to the Office for National Statistics.
This huge divergence between pay rates for the top and the rest has fuelled the political debate about living standards.
But while David Cameron talks about cutting taxes to help those on modest wages, he believes shareholders should be left to tackle the excesses in the boardroom.
New rules brought in by the coalition government this autumn give investors a binding vote on company pay policy every three years.
Companies will have to include performance targets and any prospective exit payments in that policy and can’t change it once it’s been agreed without another vote by their owners.
Other changes will lift the veil a bit more on executive pay by making companies publish what each executive is earning and issue a breakdown of what is being spent on pay compared with tax and investment.
This is all well and good if you think shareholders really care about pay disparities. However, they have tools available to them at present if they choose to intervene – and not many of them do.
There was a brief flurry of activism on the part of some UK investors last year – the so-called shareholder spring that claimed the scalps of several top executives. But since then voting against pay has dropped off. The average shareholder vote against executive pay was 6.6 per cent up to June this year compared to 7.6 per cent last year.
Modern shareholders diversify their portfolios and spread their risk, holding small portions of lots of stocks. Many of them are from overseas – 53 per cent of UK shares are held by overseas investors – and some trade so frequently they don’t know what they’re holding.
Of course, there are some dedicated long-term UK-based investors who do engage with companies, but even here, many are cutting back their governance departments in search of greater efficiencies. Some also resent being in the front line of public policy decisions.
For this reason, we do not believe shareholders can hold companies to account on their own. At the High Pay Centre, we have argued that there should be a bigger role for employees to be involved in strategy and pay decisions, whether through the election of employees to remuneration committees or as full board members.
Company boards are currently made up of mainly white, middle-aged men from very similar backgrounds. There is little challenge to orthodox thinking, whether on pay or anything else.
Maybe if Barclays had consulted its own employees more, Bob Diamond might have heard that there was something going on in the Libor rate-setting department, before the regulators stepped in.
There are strong business reasons for reducing pay disparities. Huge pay gaps undermine morale among the wider workforce and lead to adverse effects on business.
A new book by economist Andrew Smithers, argues that the way directors are paid is hampering recovery. That is because chief executives are wary of investing for the long-term when a short-term drop in profits could hit their bonus.
Excessive pay at the top is a drag on our economy, but we can’t rely on shareholders to deal with it.
It’s about time policymakers stopped kidding themselves.
(This article initially appeared in the Daily Mail)