Responsibility to change executive pay rests with pension funds – BEIS

The “primary responsibility” for changing the environment on executive pay rests with the asset owners – pension funds - the Business, Energy and Industrial Strategy Committee has said.

The committee’s report, Executive rewards: Paying for success, examines the progress the government is making on the gap between executive and employer pay and the performance of the company.

The report noted that over the last decade chief executives’ earnings in the FTSE 100 have increased four times as much as national average earnings, and describes this differential as having been “baked into the pay system”, in part by a heavy reliance on over-generous, incentive-based pay and partly by the weakness of remuneration committees.

The report concluded that “primary responsibility for changing the environment on executive pay rests with asset owners – the pension funds that invest our money for the long-term”.
However, it said that although it has heard that levels of engagement by the best asset managers with larges companies are generally good, “too few institutional investors, such as pension funds are active enough”.

“For most asset managers, remuneration will simply not be a priority, compared to the other reasons on which investment decisions are taken. Given the complexity of executive pay and the difficulty of securing a consensus for change, there are understandable practical disincentives to engagement. We cannot rely on shareholders to exert pressure. One witness told us “they care about levels of executive pay a little less than the public probably does” and therefore will apply less pressure here than the public might like,” the report stated.

The committee has advocated a simpler structure based on fixed-term salary plus deferred shares, vesting over a long period, and a much- reduced element of variable pay, which should be more aligned to the wider social responsibilities of companies.

“We also argue for a much stronger link between executive and employee pay, for example by the greater use of profit-sharing schemes. We recommend an employee representative on the remuneration committee to strengthen this link,” the report stated.

In addition, the committee welcomes the proposed replacement of the “underpowered and passive” Financial Reporting Council (FRC), and recommend that the new regulator is given the tools and encouragement to be tough on those companies that behave unreasonably on executive pay and fail to adhere to the tighter requirements of the revised UK Corporate Governance Code on higher quality pay reporting.

It follows the Kingman review, published in December 2018, recommended that a new body be set up, which is accountable to parliament, with a new mandate, new clarity of mission, new leadership and new powers. The new regulator would be called the Audit, Reporting and Governance Authority.

Commenting on the report, CIPD senior reward and performance adviser, Charles Cotton, said: “It’s high time that high pay is tackled. The growing gulf between pay for top earners and the rest of the workforce calls into question both the fairness and overall performance of our workplaces. Success is a collective achievement and it isn’t right that some top earners take home multi-million-pound packages while pay for their average worker has struggled to improve in recent years.”

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