Annual cap recommended on total remuneration for executives
29 March 2019
In a recently published report by the Business, Energy and Industrial Strategy (BEIS) Committee, companies must do more to link top bosses’ pay to that of the rest of their workforce.
Rachel Reeves MP, Chair of the Committee, said:
"Eye-watering and unjustified CEO pay packages are corrosive of trust in business and threaten to undermine the public’s support for the way our economy operates...”
Referencing “shaming” executive pay decisions such as those at Persimmon, Royal Mail and Unilever, the report says that “huge differentials” in bosses’ pay are “baked into the pay system”. A heavy reliance on “over-generous”, incentive-based executive pay, too often waved through by weak remuneration committees in the habit of designing ever more complicated pay packages, is at the root of excessive executive pay packages, say the BEIS Committee.
The report notes that over the last decade chief executives’ earnings in the FTSE 100 have increased four times as much as national average earnings. FTSE 100 chief executives earn around £4 million per annum while average pay is under £30,000. The report calls 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.
To help tackle excessive pay awards and deliver fairer rewards across businesses, the BEIS Committee calls for a stronger link to be made between executive and employee pay, recommending businesses make greater use of profit-sharing schemes, and that companies are required to appoint at least one employee representative to their remuneration committee.
The report finds that the “say on pay” reforms introduced in 2014 have had some impact in curbing levels of new pay awards, which have remained fairly flat over the last decade.
The report criticises the “underpowered and passive” Financial Reporting Council and calls for the new regulator to be more robust and proactive in bearing down on excessive executive pay and willing to get tough with companies who fail to behave responsibly on CEO pay.
The report recommends that, as a matter of practice, and to reduce the risk of Persimmon-type awards and associated reputational damage, that remuneration committees should set, publish and explain an absolute cap on total remuneration for executives in any year.
On pensions, the report welcomes the Investment Association’s announcement in February 2019 that it will monitor and flag up any company that pay pension contributions to new directors in a way not aligned to the majority of the workforce and recommends that the new regulator seeks public explanations from any company that fails to deliver alignment on pensions contributions.
While welcoming the introduction of new requirements to publish CEO pay ratios, the report recommends reporting requirements are expanded to include all employers with over 250 employees and that data on the lowest pay band be included alongside the quartile data required.
Further information on CEO pay ratio reporting
The Companies (Miscellaneous Reporting) Regulations 2018 came into force on 1 January 2019 and require listed companies with more than 250 employees to report their CEO/worker ratios along with other employee engagement information. The legislation applies to financial years starting on or after this date, so the first organisations will publish from January 2020 onwards.
The CIPP policy team has produced a short webcast which provides an overview of the reporting requirements.
The CIPP also run an online training course which is aimed at payroll coordinators, payroll managers, HR managers and finance professionals who have responsibility for preparing CEO pay ratios figures and/or the accompanying narrative in the annual Directors’ Remuneration Report.