When remuneration comes up as a governance topic its usually when the spotlight is on the hefty sums paid to those around the boardroom table. New research from a think tank seeks to change that by placing employee pay packets at the heart of the governance debate.
The Social Market Foundation (SMF) has called for a reform of the law to ensure workers can “share in the proceeds of growth”. The researchers also called for a new “kite mark” for businesses that would enable investors to see which companies are progressive on pay for workers.
According to Nicole Gicheva, joint author of the report, the proposed changes in the law would merely be an “update” recognising what good employers already know—that “paying and training staff well is good for business”.
She added that investors have a role to play too. “It’s not good enough to offer warm words about supporting responsible business. People want to know their pension savings are invested in a way that encourages firms to look after their staff properly.
“ESG investing can produce good returns and social benefits, but investors need to aim higher on labour standards. Just complying with labour laws isn’t enough—responsible investors should back companies that deliver rising wages and equip their staff with skills for the future.
“Too many British workers are still trapped in low pay.”
Transparency and responsibility
At the heart of proposals is Section 172 of the Companies Act 2006, the much discussed and debated clauses that set out the responsibilities of company directors.
The think tank wants to see amendments to this section, setting out a new responsibility for directors to “ensure and demonstrate that employees, at all levels of the company, are sharing in the proceeds of company growth”.
There is also a demand for new transparency measures that would see companies publish data on wages, progression, HR practices and training budgets to “put them under social pressure to support staff better”.
The researchers believe this plays well to an increasing interest among big institutional investment managers to place their assets in ESG (environmental, social and governance) funds, or responsible investing.
UK companies will this year begin publishing Section 172 reports, following regulations introduced last year. The think tank wants action on employee pay to be included in the reports.
As evidence of the growing interest around employee pay the SMF cites Southampton University research, which found that 85% of fund managers say that investment in workers is a key factor in their investment decisions.
The research also found that many investors believe Living Wage Accreditation—a certificate handed to companies for paying the UK living wage, currently at £10.55 an hour in London—can improve employee credibility; acknowledges the social benefits of living wages; and boosts staff morale, as well as reputation, recruitment prospects and staff retention.
When the SMF surveyed pension fund members they found that pay and conditions of employees was the second most important issue, only just behind financial performance and ahead of executive pay and impact on the environment.
“This suggests that the issue of low pay and training could be salient with investors,” the report said.
However, the SMF makes a further point. Pay is a significantly more important issue for younger investors, who are more likely to prioritise the topic above “pure financial returns”. That may prove significant as those investors begin to express their views to their pensions funds.
Shifting the debate
Though a perennial concern among politicians and economists, employee pay receives mostly indirect attention in corporate governance measures. Recent steps include demands for companies to publish gender pay gap information, while the latest moves will see companies forced to publish their “pay ratios”: the difference between the pay of CEOs and average workers.
Even the newly revamped UK corporate governance code only mentions employee pay in the context of executive remuneration, saying they should be justified using “internal and external measures, including pay ratios and pay gaps”. It also says remuneration committee reporting should included a description of “engagement that has taken place on the topic of pay with the workforce to explain how executive pay aligns with wider company pay policy”.
At the beginning of this year another think tank, the High Pay Centre, called for an overhaul of remuneration committees to turn them into “people and culture” committees, with employees among their members.
New terms of reference would include evaluating the “impact” on culture of rewards arrangements throughout the organisation. “For example by examining whether pay and benefits are aligned with the company’s purpose; whether they incentivise appropriate behaviours and performance; and whether differences in pay and reward levels are fair and proportionate.”
However, these efforts still focus on pay differentials seen through the prism of rising executive pay, or on corporate culture (executive pay levels are increasingly viewed by investors as a proxy for corporate culture). Reforms to governance and campaigning have ostensibly focused on shedding light on pay at the top rather addressing concerns about pay among workers. The SMF report clearly attempts shift the debate to new ground.