How much is too much?

 

A short discussion about a year long inquiry by the High Pay Commission as to executive remuneration is available on the BBC website. The full report can be found here.

See here for the news article.

Also, see here for the full business 'bottom line' about business ambition.

Chair of the High Pay Commission Deborah Hargreaves and Dr McGregor of the firm Taylor Bennett highlighted the following issues:

  • Executive pay is complicated a should be simplified as shareholders cannot understand 

I would propose it is far from complicated. In fact it is pretty straightforward bar a few elements such as rights issue adjustments. Directors are usually awarded a base fee, a bonus based on year performance -sometimes 3 years (shares and cash), and an Long Term Incentive Plan (LTIP - in shares based on a 3 year performance period against a comparator group on measures such as Total Shareholder Return (TSR) and Earnings Per Share (EPS)). They also receive benefits e.g. company car and a pension which is not monies paid by the company rather it is a debt.

They are also entitled to participate in Save As You Earn (SAYE) schemes where they can buy shares in the company; as well as share option schemes.

  • That executive pay is a 'closed shop'

Linking to the first point, really. It is quite transparent, executive remuneration, in truth.

  • There should be worker representation on the board

As Dr McGregor rightly points out, but was drowned out, it is not right to have worker representation on remuneration committees as suggested by as proposed by Deborah Hargreaves. We do not have co-determination. She is also right in pointing out the pension funds do have employee representation on them as they have an interest in it as it represents their shares.

If you listen carefully (at around 5:30) the host also tries to argue that the directors are all members of the "same club" who award each other vast amounts of remuneration - hinting towards the governance debate about multiple directorships - and employee representation will prevent abuse. From my own research there appears to be very little cross over between non-executives on remuneration committees and executive directors on FTSE 100 companies.

In truth there are probably better ways at encouraging consideration of employees than having a voice on the remuneration committee. If corporate governance codes are used to influence committee members to include median employee earnings, for example, alongside TSR and EPS when awarding LTIPs this may create a fairer system. So when directors' pay is up employees should not be losing their jobs and having salary reduced.

  • Directors are unlikely to leave if pay becomes more stringent

Deborah Hargreaves argued that it is a myth that directors cross borders to get the best pay packages and it is merely used as an excuse to award high executive salaries. She argues that as you move up the ladder you actually become less mobile.

  • Shareholders should set pay

Both guests suggested that shareholders should set pay. I would propose the opposite. Shareholders setting pay is not practical. We have spent years moving away from shareholder involvement because they generally do not take an active interest in the running of the company as they spread their risk across different companies. Governance structures tell us that better remuneration policies will come from a stronger non-executive board and remuneration committee.

Furthermore, if shareholders do not understand executive remuneration, what qualifies shareholders to set remuneration? It is a self defeating argument. There are very few reasons why shareholders would wish to increase their involvement.

If shareholders did set pay they would probably still consult the same advisors to the remuneration committee themselves and nothing is likely to change.

For more commentary on directors' duties and shareholder litigation, visit Gibbs: Law and Life, a blog centering on directors' duties and company law, particularly on interpretation and practicality of directors' duties in the 21st Century.

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