As Inequality Soars, Executive Remuneration Comes Under Microscope

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Since January 2019, UK companies with over 250 employees must disclose and explain the gap between their top bosses’ pay and that of the average worker.

The reforms, which are part of the government’s efforts to enhance corporate governance within the UK’s biggest companies, mean that pay ratios will be made public from 2020. Just as with the negative gender pay gap headlines earlier this year, many companies will come under scrutiny.

Rightly so too, as logic and research on human potential suggests the optimal state for performance is with pay, status and privilege being normally distributed across a spectrum of diversity at every level.

Impatience and activism about these imbalances are mounting. Companies that don’t take note are failing to recognise that they are increasingly out of step with societal demands for ‘fairer’ treatment on pay and opportunity.

While the negative headlines are likely to cause companies to put forward a narrative that explains their ‘unfair’ pay ratios, noisy pressure groups are unlikely to accept these excuses. These activists believe that the strategy of meritocracy, which favours promoting the best candidate, actually bakes in over and under representation through an entrenched and skewed process of biased selection.

Many companies will be caught out, but the conundrum they face is less of a PR issue and more of a data issue. That’s because they do not have the data to back up their claims. Which is why organisations that don’t have a full spectrum view of their total employee cost – encompassing pay, pension, bonus, rewards (which are often held in discrete data silos across an organisation) – will continue to come under increasing scrutiny.

Executive remuneration: Changing corporate governance

As mentioned, the pay ratio reforms have come about as a result of wider corporate governance reforms announced by the Department for Business, Energy and Industrial Strategy (‘BEIS’) in August 2017.

The specific requirement for pay ratio reporting means that quoted companies in the UK with 250 UK employees will need to publish the ratio of the CEO’s ‘total remuneration’ to the median, 25th and 75th percentile ‘total remuneration’ of their full time UK employees.

In addition, executive boards must establish a remuneration committee of independent non-executive directors to determine the policy for executive director remuneration and set remuneration for the chair, executive directors and senior management.

The remuneration committee will be charged with reviewing workforce remuneration to ensure it is aligned with company culture, as well as ensuring incentive schemes drive behaviours consistent with the company’s purpose, values and strategy.

The committee’s work must be described in the company’s annual report, including “an explanation of the strategic rationale for executive directors’ remuneration policies” and the “reasons why the remuneration is appropriate using internal and external measures, including pay ratios and pay gaps”.

Therefore, understanding ‘total remuneration’ is obviously vital. It’s also worth considering why this reporting has been put in place.

The history of audit and reporting is that if you do nothing, nothing changes or you enable and even encourage bad behaviour. Reporting is a way of pointing a speed camera at potential violators. If people are observed they will behave better. In its current format, it is a shaming device based on the power of public scrutiny but penalties could easily be applied.

Also, it’s not just governments or external pressure groups that are pushing back against excessive executive remuneration.

Pay ratio pushback is increasing

Shareholders across major western economies are now also involved in resisting the record remunerations that some senior executives are being offered.

In April, Hammerson shareholders were urged to vote against payouts to its top executives. The Bullring and Brent Cross shopping centre company had moved into the red prompting a board reshuffle, including the departure of CIO Peter Cole, along with his salary of £986,000.  While in 2018, Persimmon boss Jeff Fairburn was asked to leave after his £75m bonus payout had a “negative impact” on the construction business. And, just this month, critics have accused Boeing of paying more attention to executive pay and profits than the safety of its passengers.

It’s not just the UK that has been caught up in this issue either. In the US, lawmakers proposed changes to executive compensation rules in the wake of the 2008 financial crisis. These should have been implemented as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act that passed in 2010. Eight years on and a number of the executive compensation provisions remain to be approved.

As a result, pushback against executive remuneration is occurring in the US too, with JP Morgan shareholders being advised to vote against executive compensation proposals.

This type of voting will only increase as more groups start to demand access to the data that explains all sorts of remuneration strategies. It will undoubtedly lead to a slew of negative headlines, similar to the gender pay gaps one.

More pertinently though, do CEOs want to be in charge of companies that talented people from diverse backgrounds don’t want to join because they can see the hard evidence of bias against others who have tried to climb the ladder? And it’s been opined that it’s now down to ‘capitalists to save capitalism’ – with its all too apparent inequalities –  in order to prevent potentially destructive wholesale change and preserve our current system of regulated capitalism.

Why compliance will be difficult for large multinationals

Although it is technically possible to access total HR and reward data across large multinational corporations, many will struggle to do so with the systems they have in place right now.

This is important because the terms of the UK corporate governance code state that a company’s remuneration committee “should review workforce remuneration and related policies and the alignment of incentives and rewards with culture, taking these into account when setting the policy for executive director remuneration.”

Furthermore, there is a requirement to explain and not just comply with these regulations, in order to show greater acceptance of the principal of normal distribution at all levels.

How can they do any of this if they can’t access total HR and reward data that covers the entire business?

These data requirements are constantly increasing. Whether related to gender pay, executive pay or the ethnicity pay reporting that is expected in future, corporations are likely to be hounded for data even though their existing systems are not up to scratch for this new world.

Executive remuneration: Accessing the data

Instead of scrambling around to react if and when the negative headlines hit, or a statutory reporting deadline is introduced, businesses should be proactive about their access to, and utilisation of, data. In doing so, the process should be seen as a far-reaching business optimisation benefit, rather than a regulatory burden.

Most multinationals know that the data is available. The most important step is to consolidate it from isolated and unconnected silos. This is not straightforward if done from scratch but Total Reward Systems are making it both possible and efficient to execute.

This consolidation of data also makes statutory reporting more efficient. Plus, it allows companies to tell the full story of total rewards and remuneration, rather than just be labelled with a negative headline.

Most importantly of all though, having this sort of data available will transform a business into one that is able to make better, data-driven business decisions in a much faster way. Beyond the box ticking exercise of annual regulatory reporting, this is what will really affect bottom line for years to come.

About the Author

Ken Charman, a veteran of software development, is CEO of uFlexReward, a real-time, enterprise Total Reward Systems (TRS) that originated from Unilever, where Ken led the build and implementation of the project from the ground up. Ken is also a fellow at the University of Newcastle-upon-Tyne and sometime lecturer at Oxford University.

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