Back in 2012 the UK was in the grip of a debate about executive pay. The coalition government of Conservatives and Liberal Democrats were determined to do something about it. Indeed, by 2013 UK shareholders had received powers to vent their frustrations over pay levels through “say on pay” measures in the Regulatory Reform Act.

According to The Times, company chairs fumed over the new law: “Giving outsiders a say on pay would be the last straw,” wrote one opinion writer. In the Financial Times meanwhile, another writer suggested pay was ripe for reform because “large shareholders have at last started to flex their muscles over spurious performance targets and from New York to London they are demanding change”.

Except it seems things didn’t really change much. According to a report out this weekend from a think tank, the High Pay Centre, while the UK’s “say on pay” measures have been around for five years, little has moved on.

Provocatively titled The Myth of Shareholder Stewardship, the report reveals that during those five AGM seasons no FTSE 100 remuneration policy was defeated during shareholder votes. Indeed, the average level of dissent was just 9.3%. Only around one in ten pay-related shareholder resolutions received “significant” dissent of 20% opposition or more.

The High Pay Centre says the results come despite median CEO pay levels reaching £3.9m in 2017, 137 times the annual salary of the typical UK worker. The average CEO pay ratio to their own employees’ has gone from 59:1 in the late 1990s, to 145:1 today.

The think tank cautions there is growing public concern about pay levels and inequality in the UK. The 2018 Edelman Trust Barometer found that excessive executive pay was the biggest reason cited for a lack of trust in business. Moreover, the High Pay Centre believes it is “difficult” to establish a link between high pay and performance.

What worries the think tank most is that shareholders have simply failed to intervene, leaving executive pay soaring.

“Our analysis shows conclusively that, although executive pay levels have remained at provocatively high levels, shareholder pressure has been virtually negligible, with most pay packages and the policies that result in them waved through without serious opposition. In this respect, shareholder say on pay has failed.”

Cultural bias

The High Pay Centre believes there could be a number of reasons for this. There could be a “subconscious bias” in favour of highly paid execs because investment managers too exist in a culture of high pay.

Asset managers may also be risk averse: high pay levels are more tolerable than the fall-out from losing a a good chief executive over pay issues.

The High Pay Centre also believes there may be too little resource among fund managers to engage properly with boards. Those that do have too little influence to make a difference. “Our research shows that even the largest institutional shareholders with the greatest resources to engage with investee companies typically constitute a fraction of the shareholder base, meaning that action on top pay requires the engagement of multiple different shareholders,” it says.

There is broad agreement that engagement on pay is not exactly the highest priority among investors. However, a recent report from the House of Commons business committee concluded that more stewardship goes on behind the scenes, meaning change would not always be reflected in dissenting shareholder votes.

A further survey has found that 75% of those companies rocked by a “significant” dissenting vote against pay policy took action the following year. The Investment Association, a professional body for investment managers, has noted in the past there is more dissent in FTSE 250 companies than their FTSE 100 colleagues. Overall, MPs concluded that there is more action on pay than seems apparent, but not enough.

“We welcome the increased attention on executive pay but recognise that much more engagement will be required to drive a more enlightened and acceptable approach to executive pay,” the MPs’ report.

Fiona Reynolds, chief executive of Principles for Responsible Investment (PRI), a body that works to help investors incorporate environmental, social and governance (ESG) factors into investment decisions, takes the same stance as MPs. She says that voting against excessive pay is “on the rise” but these practices “are not always applied consistently”. She adds that active and engaged investors are countered by those “seeming to rarely if ever vote against pay increases”.

According to Reynolds: “With rising inequality and lack of trust in the business and finance sectors, ensuring that the structure of executive pay is appropriately screened is an essential role for investors.”

Regulatory pressure

MPs on the business committee had a list of recommendations for fixing engagement on pay. They called for measures to ensure remuneration committees report on engagement with investors and their reports monitored by a regulator (the successor to the Financial Reporting Council).

They also want to shift responsibility for engagement from asset managers to asset owners. The committee wants a review of the UK’s stewardship code to ensure owners report publicly on their objectives, including those in relation to executive pay. It also wants the regulator to take action against owners who fail to sign up to the new code.

Moreover, the committee wants the new regulator to broadly exert “significant downward pressure” on pay levels by reviewing its own guidance to companies on remuneration.

But MPs also identified a much more fundamental point. “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.” That’s a much deeper point and one likely to take more time to resolve.

That all being said, it is clear that there is further pressure to come on pay issues. Engagement is increasing but the UK is yet to put in place a new governance and financial reporting regulator to succeed the FRC.

Once it’s up and running it may yet bring a renewed assault on pay levels, along with a new stewardship code forcing assets managers and owners to play a greater role. Pay will remain a fixture of the governance agenda for the foreseeable future.