The new governance and accounting regulator for the UK should have powers to tackle companies over excessive executive pay levels, according to a report from an influential House of Commons committee.
The report from MPs on the commons business, energy and industrial strategy (BEIS) committee ramps up pressures on boards over pay levels yet again.
The Financial Reporting Council is about to be replaced by a new regulator—the Audit, Reporting and Governance Authority—following a review. The committee’s report says the new body should be “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”.
Rachel Reeves, chair of the BEIS committee, urged boards to look carefully at the pension packages given to chief executives. She also called for worker representatives on remuneration committees.
Reeves said: “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.
“But these examples also highlight the persistence of executive pay policies where far too little weight is given to delivering genuine long-term value, investing in the future, or ensuring rewards are shared with workers.”
She added: “When they fail, we need a regulator with the powers and mindset to step in and get tough on businesses who pay out exorbitant sums to their CEOs.”
The MPs also called for changes to the UK stewardship code, believing it should place more pressure on asset owners rather than asset managers to act. The report calls on the code to call on asset owners to report on their investment objectives, including those in relation to pay. MPs also want the new regulator powers to take action against asset owners who fail to “sign up to or meet their responsibilities, under the code”.
Proxy advisors also face calls to ensure their advice offers policies that “resist excessive and poorly designed pay policies and rewards.”
‘Wider social responsibilities’
Broadly, the MPs are disappointed that the the “investment chain” is not achieving more success at holding pay levels down.
“At present we do not believe that the incentives of all those involved in the investment chain are sufficiently aligned and attuned to the wider social responsibilities of companies,” the report said. The committee said only a revised stewardship code can achieve “genuine and effective engagement between companies and their shareholders on executive pay”.
The stewardship code was in fact recently revised to ensure investment managers report more on outcomes of their investment policies than the policies themselves. The revised code does call on owners to report “at least annually” on their policies and their implementation. Signatories to the code are expected to include owners.
Think tank the High Pay Centre monitors executive pay levels in the UK and general income inequality across the workforce. Its Pay Counter concludes that the average FTSE 100 chief executive takes just just three days to earn as much as a UK worker on average pay.
In January the High Pay Centre called for major reforms to remuneration committees, proposing they that become “people and culture” committees. It suggested companies dump long-term incentive plans as default CEO pay models in favour of a system based on basic salary plus an incentive to “deliver sustainable long-term performance” through smaller restricted share awards.
In August last year the High Pay Centre’s annual survey found that median pay for a FTSE 100 CEO had jumped 11% during 2017 to £3.93m, though the rise was affected by pay deals at Persimmon and Melrose. Calculating the mean figure for CEO pay showed a 23% rise.