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Law for Business

Knowhow - guidance - precedents

06 SEP 2012

'New Diet for Fat Cats' Part 2

With headlines such as ‘FTSE 100 chiefs paid 145 times average salary' (May 2011) and findings that over the last decade FTSE350 executive pay grew more than corporate performance (Sept 2011), it is little surprise that there continues to be public, government and cross party concern over the high level of executive pay in certain areas. But this is not the public sector (already being considered by Lord Hutton) - so how can, and indeed should, the private sector be fettered by restrictions on how much they pay those who run British companies?

Sir Stuart Rose (Chairman of Marks & Spencer) commented in an interview with The Telegraph in March, ‘I am absolutely a free marketer and I believe the creation of wealth is a good thing and anyone who doesn't, really need their heads examining'. However, even as the highest paid FTS100 Chairman, he believes that the pay gap has widened and ‘there is a very real need to have these [pay] debates and they need to be had urgently and publicly'.

The High Pay Commission published its final report on 22 November 2011 after a year researching top pay in the private sector. It commented on social and economic issues as well as recent executive pay inflation relative to average pay and included 12 recommendations for reform.

Amongst them were:

-        Radical simplification of executive pay to comprise basic salary and ‘one additional performance-related element....where absolutely necessary'. The report's favoured element would be a performance share plan award that would vest at 20% per annum in years 6 to 10 following grant. This would be a major change to current practice pushing out share plan vesting over 10 years to ensure long term buy-in.

-        Disclosure of top 10 pay packages earned by executives below board level. Again this is a significant change to require disclosure below board level.

-        Inclusion of employee representative on remuneration committees. This is a recognition that the current single board system is not effective at holding executive directors to account in the long-term interests of the company over issues of pay.

-        Adoption of standard format for director's remuneration reports to include a single total remuneration figure for each executive together with the manner in which is has been calculated.

-        Reform of the directors remuneration report requirements to include forward looking pay proposals over the next 3 years.

-        Publication by listed companies of ‘fair pay reports' setting out the ratio of the highest to median pay within the company and changes in this ration over 3 years

-        Establishment of a permanent national body to monitor, comment and report on high pay. This body would also ensure that company legislation delivers transparency, accountability and fairness in pay at the top of British companies.

The High Pay Commission proposes that its reforms are addressed through a voluntary code, with amendments made to the UK Corporate Governance Code. Others consider that direct laws are needed to address current dissatisfaction.

Lord Gavron's Private Members Bill, the Company Remuneration Policy Bill received its first reading in the House of Lords on 11 May 2012. In it he proposed that decisions concerning the remuneration of the company's directors and five most highly paid employees must be approved by shareholders at AGM and voted on in a secret ballot by all of the company's employees. The company's annual report should carry the result of the vote and feature details of the remuneration ratio between the highest remunerated director or employee and the average remuneration of the lowest remunerated 10% of employees. Such a proposal is fraught with difficulties but does signal the concern amongst many that the gap continues to widen between those at the top and the majority of the workers engaged to make the profits to pay them.

Cynics suggest that it is highly unlikely that a Private Members Bill will enter the statute book.

I am sure that we will hear a lot more about executive pay over the coming months as companies send out their annual accounts and reports (which have to disclose the current and following year proposed remuneration packages to board executives) to shareholders and there is a renewed called for restraint and control over increases in remuneration and payment of large bonuses at a time of economic uncertainty and volatility.

Kate Anthony Wilkinson

Jordan Publishing Company Administration and Governance

Jordan Publishing Company Administration and Governance

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