Saturday, August 17, 2024

10 ways we could curb undeserved executive remuneration and secure equitable distribution of income

Prem Sikka 
16 August, 2024 
LEFT FOOT FPRWARD
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Opinion

The High Pay Centre reported this week that FTSE100 chief executive salaries has soared



This week, the High Pay Centre reported that the salary of FTSE100 chief executives has soared. The average FTSE100 CEO’s pay increased from £4.42m in 2022 to record £4.98m in 2023, which is an increase of over £500,000 in one year equivalent to 23 years pay for someone on the national minimum wage. The median pay increased from £4.1m to £4.19m. The median pay of the full-time UK worker is just £28,752, unchanged in real terms since 2008.

81% of FTSE 100 companies paid their CEO bonuses in accordance with a Long Term Incentive Payment plan though the same bonuses are rarely given to employees whose brains and brawn generate wealth. The number of CEOs collecting more than £10m has increased from four to nine. These include AstraZeneca CEO collecting £16.85m; Relx, £13.64m; Rolls Royce, £13.61m; BAE Systems, £13.45m and £10.64m at HSBC.

Higher profits may be good news for executives and shareholders, but not necessarily from a social responsibility perspective. Water companies dump raw sewage in rivers and seas, which boosts profits and executive pay whilst creating health hazards for people. HSBC has a long history of egregious business practices. In December 2021, it was fined £64m for “serious weaknesses” in monitoring of money laundering and terrorist financing scenarios. In January 2024, it was fined £57.4m for “serious failings” over its measures to protect customer deposits. In May 2024, £6.28m fine for failing to give due consideration to customers when they fell into arrears or were experiencing financial difficulties. Rolls Royce is facing a £350m lawsuit over bribery and allegation allegations after previously paying a fine of £497m to settle charges of “12 counts of conspiracy to corrupt, false accounting and failure to prevent bribery”. None of these practices disrupt the executive gravy train.

FTSE 100 firms spent £755m on the pay of 222 executives, but that is not enough for some. The claim is that UK executive rewards are much lower than the US standards and unless the UK executive pay rockets the country risks a brain drain. Such claims are never mobilised to support UK workers even though their median pay has fallen significantly behind workers in other European countries. Ministers and newspapers routinely claim that wage rises for workers, even for those on the minimum wage, are inflationary but that logic is never applied to executive pay.

Executive pay is detached from economic growth, productivity and wage levels for workers. Thomas Piketty argued that today’s chief executives are a generation of “super-managers” who, for the first time in history are able to become independently wealthy by running a public company for a handful of years. They do not necessarily produce wealth but get a disproportionate share. Just look at the UK finance industry which routinely hands mega pay packets to directors. Between 1995 and 2015 it made a negative contribution of £4,500bn to the UK economy, and is routinely involved in scandals.

Executives at poorly performing companies collect megabucks even when they are teetering on the edge of bankruptcy. In theory, remuneration committees staffed by non-executive directors are supposed to check misguided rewards but they have shown no inclination to so, especially as their own lucrative appointments depend on the benevolence of executive directors. The Post Office scandal has once again shown the ineffectiveness of non-execs. The remuneration committee continued to approve bonuses even though the company was engaged in illegal prosecution of postmasters.

The High Pay Centre reported that the typical CEO’s pay is equivalent to 120 times the annual pay of the average full-time worker. This fuels inequalities, concentration of wealth and power and damages social fabric. The rich can fund political parties and think-tanks; lobby policymakers and use social media; own TV and radio stations to advance their interests, whilst the rest of the population can’t and is increasingly excluded from social consumption. Inequalities have severe implications for access to good housing, education, food, pension, healthcare, transport, justice, security, democratic institutions and much more. Households on low income have shorter life expectancy, higher stress, infant mortality, health and psychological disorders.

Successive governments have shown little interest in equitable distribution of income. To appease corporate elites they have resorted to voluntary approaches. Voluntary corporate governance codes such as the Cadbury, Greenbury, Hampel and others have failed to check undeserved executive pay. They are content to rely upon non-execs and shareholders. The shareholder-centric model of corporate governance expects geographically dispersed shareholders to check undeserved executive pay. However, shareholders of listed companies have only a short-term interest in companies and are rarely focused on curbs on excessive executive pay or social justice. Some 57.7% of the shares of UK listed companies are held by overseas beneficiaries and they have no incentive to curb social squalor in the UK. The nine shareholders of Thames Water have shown a voracious appetite for dividends, and none for curbing sewage dumping or executive pay. In family-owned large companies, of which BHS is a good example, it is unrealistic to expect members of the family to vote against the pay of another family member. Even if shareholders vote against executive pay, their vote under UK Companies Act 2006 is advisory rather than binding. At Pearson 47.6% of shareholders voted against executive remuneration policy but it made no difference. It is hard to think of any court case where shareholders have sought to enforce Section 172 of the Companies Act 2006, which requires directors to have regard for the interests of employees, and withhold executive pay or demand a more equitable outcome for employees or consumers or other stakeholders.

A different approach based on democracy and stakeholder empowerment is needed. Here are some suggestions:In the case of banks, insurance, water, rail, energy, internet, mobile phones and many other businesses customers can be identified with certainty and should be empowered to shape corporate governance. Unlike shareholders, workers and customers have a long-term interest in the wellbeing of a company and need to be empowered.
Around 35% – 50% of the members of unitary boards of large companies should be elected by workers and/or customers, or companies could choose German style two-tier boards with the supervisory board elected by workers and/or customers.
Executive remuneration contracts should be made publicly available so that all details are clear.
The remuneration of each executive at large company must be the subject of an annual binding vote by stakeholders, including shareholders, employees and customers. This should encourage directors to ensure that workers receive a good share of the wealth created. Customer vote on executive pay would help to curb predatory practices such as profiteering, dumping sewage in rivers and shoddy services.
The vote on fixed executive salary can be the subject of a simple majority vote by all stakeholders, with at least 50% turnout. Bonuses should only be given for extraordinary performance and subjected to extraordinary approval. At least 90% of the stakeholders must support it, on a 50% turnout.
If 20% of the stakeholders vote against the director remuneration policy, the board must receive a warning to mend its way. If the same happens in the next year then the stakeholders should have the option to trigger a resolution at the general meeting on whether the executive and stakeholder directors, with the exception of the managing director and/or chairman, need to stand for re-election. If this resolution is supported by 50% or more of the eligible stakeholders then a meeting to consider re-election of directors must be convened.
Stakeholders should be given the right to cap executive remuneration. This could be in the form of a multiple of pay ratio (e.g. x times the average wage), or an absolute limit (e.g. not exceeding a specified amount) or in any other form that stakeholders see fit.
The Companies Act must provide a framework for claw back of executive remuneration to ensure that directors are held responsible for any trail of destruction left behind.
Golden handshakes, hellos and goodbyes have all become a way of inflating executive remuneration and must be prohibited. Golden handshakes bear no relationship to any notion of performance and are retained by the executives even though the appointment may turn out to be disastrous. The culture of golden handshakes can encourage a job-hopping mentality and lack of motivation to deliver the long-term welfare of a company. Golden goodbyes are often rewards for dismissed CEOs for poor performance. Payments outside of performance benefit only the executives and not any stakeholder. Such payments must be prohibited, as is the case in Switzerland.
In the case of companies with deficits on employee pension schemes, their directors must not receive any increase in remuneration unless they have reached a binding deficit reduction agreement with the Pensions Regulator.

The above suggestions may not prevent all exploitative practices but provide a sound basis for curbing undeserved executive remuneration and securing equitable distribution of income.

Prem Sikka is an Emeritus Professor of Accounting at the University of Essex and the University of Sheffield, a Labour member of the House of Lords, and Contributing Editor at Left Foot Forward.

Image credit: Marc Barrot – Creative Commons

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