There was an odd contrast in the news this week, between Monday – when David Cameron stated his intention to curb executive remuneration – and Wednesday, when a Times leader called for the 50 per cent tax band to be reduced to keep the UK an attractive place to be a successful executive. Gone are the days when political parties used the tax system to bring about social justice through strong progressive taxation.
But social justice is not off the agenda. Indeed, the three main political parties seem to be competing with each other to be seen as the party for social justice policies in a time of austerity. The prime minister has said that in his view there is abuse of the executive remuneration determination process, and the way to stop it is to increase transparency and introduce binding shareholder votes. I won’t argue the abuse point, but there is no research to suggest that the action that he is proposing, taken in isolation, will have the effect he seeks.
Mr Cameron says that he wants the ‘proper pay numbers’ disclosed. We have had executive director pay disclosure for the entire thirty years I have been involved in executive remuneration in the UK, yet the more that has been disclosed, the more pay has gone up. Similarly, in the research submitted to BIS last year, there was no evidence that countries where there was more executive pay disclosure had lower pay than those where there was only limited disclosure. The disclosure of pay differentials in the US has also had no measurable impact on executive pay levels.
A recent analysis of the boards of top UK companies suggests that the ‘I sit on your remuneration committee, you sit on mine’ scenario alleged by Mr Cameron is a very uncommon situation, so any regulatory intervention on this would have very limited effects indeed.
Similarly, Mr Cameron wants to introduce binding shareholder votes on executive pay. We have had advisory votes for nearly 10 years, and in that time, executive pay has gone up, and only a tiny minority of companies have lost an advisory vote. There is no evidence that this will change if the vote becomes mandatory.
So will the prime minister’s proposals make any difference? In themselves, I think the answer will be ‘no’. Unlike the situation in the 1980s, the majority of shareholders of major UK companies are not the activist UK insurance companies and UK pension schemes which regularly criticise executive remuneration policies. A high proportion of the shares of large UK companies are owned by overseas investors, sovereign wealth funds, hedge funds and powerful individuals – some of them short term investors who have no interest in the long term success of companies. They are less concerned about executive remuneration, and many pay their own fund managers more than the CEOs of the companies they invest in.
So would I suggest that Mr Cameron changes his plans? Well, possibly not.
Being named and shamed for having a pay ratio of 150:1 (or whatever arbitrary number chosen by the press), or having a significant number of shareholders in opposition to the executive’s pay, may be a factor taken into consideration when a remuneration committee is making its pay decisions. But in my view, it won’t be decisive.
If Mr Cameron wants to change the executive remuneration approach in the UK he will need to personally encourage remuneration committee members to look at setting remuneration with far greater reference to factors such as absolute and relative performance, clear future-looking scorecards and by how other employees in an organisation are treated. You cannot legislate this. David Cameron, George Osborne and others will have to demonstrate a genuine commitment to social justice in this matter by convincing those company directors (and other highly paid individuals) that sit on their advisory panels, donate money to their parties, and lobby them on behalf of business to demonstrate their own personal commitment to change.
This change would need to include not just how much these individuals are paid and the way they are paid, but also how much they pay other employees; the way success is shared in their organisations; the amount of their pay that is taxed in the UK; and the level of voluntary support they give to the social justice agenda. Behaviour will change only when more politicians, remuneration committee members and executives are seen walking this talk.