While regulation on directors’ pay can be counter-productive the business community needs to address the concerns of politicians and the wider public about pay inequality in the UK, advisors PricewaterhouseCoopers (PwC) have warned in a report. This is a response to Teresa May’s pledge to tighten up executive pay regulation made just before she became Prime Minister and reported on in a previous blog.

PwC notes that since the 1970s to today while globally people have been pulled out of poverty in large nunbers incomes for the developed world’s working and middle classes (between the 80th and 95th percentiles of the global income distribution) have largely stagnated in real terms. Meanwhile real incomes of the Top 1% globally have increased by over 60%. These trends have been reflected in growing inequality in a number of rich western countries, and in particular the UK and the US.

It was notable that May devoted significant attention to the executive pay issue in launching her campaign for leadership of the Conservative Party, as had Michael Gove, the report said. All the candidates emphasised the importance of an economy that works for all and so income inequality is a concern that now spans political divides, it concludes. Executive pay is a public concern that politicians can not ignore. Research carried out for PwC in June 2016 by Opinium 4 showed that two-thirds of the population believe that executive pay is generally too high, over half believe it is a big problem in Britain today, and 72% said that it made them angry if a CEO is being paid a lot and their company is doing badly.

Tom Gosling of PwC's Reward Practice
Tom Gosling of PwC’s Reward Practice

PwC analysed the Pew Research Centre’s data on attitudes to inequality against data on actual inequality from the OECD Top Incomes database and found that there is virtually no correlation between concerns about inequality and actual levels of inequality in the countries where comparison data exists. Levels of concern about inequality are much higher in France, Italy, and Spain than in the US and UK, despite levels of inequality being up to twice as great in those latter two countries, PwC found. By contrast, PwC discovered that concerns about inequality are very highly correlated with concerns about employment opportunities. This suggests, according to PwC, that anger about inequality and CEO pay is primarily an expression of frustrations about job insecurity and stagnating wage growth for ordinary workers.

The research carried out in June found that solutions to high CEO pay continue to be seen as being able to be tackled by shareholders and PwC said it is encouraging that much of the public is still looking for a market rather than a regulatory answer to the problem. May has proposed changing shareholder votes on pay from advisory to binding, more transparent pay disclosure and simplified bonus schemes. Separately she called for employees to be represented on company boards.

Although proposed solutions were all considered as part of the 2013 review by the Department of Business, Innovation and Skills and rejected at that time and PwC believes there is a good case for not taking action this is not politically acceptable. Companies and investors therefore need to take action to avoid regulation PwC suggests. Its recommendations for companies are for remuneration to  act more toughly; companies should develop a set of fair pay principles and spell out how they will treat the most vulnerable in their workforce and companies should redouble efforts to communicate the benefits of business in terms ordinary people understand. Meanwhile investors should keep up the pressure already seen on companies during 2016, embrace the proposals for changes to simplify pay and also work with policymakers who want faster solutions than the present regulations seem to provide.

Meanwhile the TUC and The Equality Trust were strong supporters of May’s proposal for workers to be represented on company boards, TUC General Secretary Frances O’Grady said, “The TUC has long argued for workers to be given seats on company boards and remuneration committees. Workers have a clear interest in the long-term success of their companies and deserve a bigger say.

Frances O'Grady
Frances O’Grady

“This move would inject a much-needed dose of reality into boardrooms, as well as putting the brakes on the multi-million pay and bonus packages which have done so much to damage the reputation of corporate Britain.

“If politicians are serious about making chief executives more accountable this is a common sense approach. I stand ready to meet Theresa May to discuss these proposals.”

The Equality Trust said it supported the move for workers to be represented on company boards, and had also campaigned on the introduction of pay ratio reporting suggested by May. Although there is a push for this reporting and some companies have signed up to this the Trust believes it needs the government’s backing and said it would shortly be announcing a campaign to introduce a new Pay Ratios Bill in Parliament.

The Trust said, “The extremely high pay ratios we now see are both unjustifiable to large numbers of the public, and often a woefully inaccurate measure of the financial value added by executives. Businesses rely on the trust of consumers. Those companies that see executive pay rocket while the pay of their average worker stagnates will struggle to square that with discerning customers, who correctly question why some organisations see executives as talent to be nurtured, and other staff as a cost to be reduced.”

IoD's Oliver Parry
IoD’s Oliver Parry

The Institute of Directors (IOD), also welcomed May’s proposals. Oliver Parry, head of corporate governance at the IoD, said, “The IoD has long argued that the leaders of large corporations have a responsibility to consider how their actions affect the general reputation of business. We are unapologetically and unstintingly pro-business, and it is exactly for this reason that we have called out failures of governance where boards have let down their shareholders, customers or employees.

“Theresa May has suggested some bold solutions, and the details will need to considered carefully, but the IoD agrees it is time to give shareholders more control over executive pay. There have been some positive signs that boards are moderating pay, but it is still possible for directors to ignore even substantial shareholder rebellions. Placing workers on boards can bring benefits in terms of better employee engagement, and we would urge companies to consider doing so, although we would stop short of making it compulsory for firms.”

Last Updated: 17 July 2016
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