Britain’s biggest companies have been urged by MPs to cap “eye-watering” salaries for top bosses and align them more closely with their workers — or face a crackdown from the authorities.
A report from parliament’s business select committee claimed that soaring CEO pay packages at FTSE 100 firms were a symbol of “corporate greed” and were tarnishing Britain’s reputation.
Executive pay is set to overshadow forthcoming annual general meetings with increasing scrutiny from investors on lavish executive pension arrangements as well as pay.
In recent weeks, companies such as HSBC and Centrica have moved to reduce CEO pension perks to allay shareholder anger. But others, such as Barclays, Standard Chartered and Royal Bank of Scotland, are being urged to take similar action.
The business committee said that regulators should seek public explanations from any company that fails to deliver alignment on pensions contributions.
The group of MPs called for a stronger correlation to be made between executive and employee pay, citing “huge differentials” in the system.
Rachel Reeves, the Labour MP and chair of the committee, said companies were giving “eye-watering and unjustified” pay packets while placing too little value on delivering genuine long-term value, investing in the future or ensuring that rewards are shared with workers.
The committee’s report criticised “weak” remuneration committees, arguing they wave through “overgenerous”, incentive-based executive pay awards.
To address the failure, it recommended they should set, publish and explain an absolute cap on total remuneration for executives in any year and allow workers to sit on committees and include staff in profit-sharing schemes.
Sarah Wilson, chief executive of Minerva Analytics, a consultancy that advises shareholders, said: “CEO pay does not reflect most people’s reality and it’s creating stress. They’ve touched on a very important and sensitive issue for British society.”
But she said it would be difficult to implement the recommendation that boards should set an absolute cap on total pay.
Roger Barker, head of corporate governance at the Institute of Directors, said that the idea of adding workers to remuneration committees created “significant governance issues”. He added: “While superficially attractive, we doubt that such a measure would be a positive step forward for UK corporate governance”.
The Investment Association recently sent a letter to remuneration chairs at FTSE 350 companies reminding them of the revamped UK corporate governance code, which says pension contributions for executive directors should be aligned with equal that received by regular employees.
Andrew Ninian, director of corporate governance at the group, said it had been “consistently clear” that it wanted companies to do more to set justifiable levels of pay.
Last year, Royal Mail and Persimmon suffered shareholder rebellions over executive pay while Unilever only mustered weak support for its new pay policy.
Former CEO of housebuilder Persimmon Jeff Fairburn attracted a storm of negative headlines last year over his £85 million pay package over two years.
“The roll-call of dishonourable executive pay decisions at firms including Persimmon, Unilever, Royal Mail, BT, Melrose and Foxtons, tell the all too familiar tale of corporate greed which is so damaging to the reputation of business in our country,” said Ms Reeves.
Over the past decade, CEOs’ earnings in the FTSE 100 have increased four times as much as national average earnings.
The committee called for businesses to move executive pay structures away from “unpredictable and excessive bonuses”, with a greater element based on fixed basic salary plus deferred shares.
The report said, however, that because the asset management industry itself was no stranger to high pay awards linked to short term investment returns “it may be awkward, if not hypocritical, for them . . . to criticise pay policies for prioritising short-term financial incentives”.
Luke Hildyard, director of the High Pay Centre, said the typical CEO earned the average British worker’s annual salary in under three days.
He welcomed the committee’s recommendations, saying: “In addition to the corporate governance reforms identified by this report, it’s important to acknowledge the role of an empowered workforce and active trade unions in tackling the gap between the super-rich and everybody else.”
