A group of top City of London shareholders and businessmen say executive pay is “not fit for purpose” and needs serious reform.
The Executive Remuneration Working Group, set up last September by the Investment Association, says in its draft report that pay packages for top bosses are currently “not fit for purpose and [it] has resulted in a poor alignment of interests between executives, shareholders and the company.”
The report was released on Thursday, the same day as FTSE 100 mining giant Anglo American faced a shareholder revolt over its CEO’s pay. Almost 42% of investors voted against the £3.4 million pay of CEO Mark Cutifani at Anglo American’s AGM in London.
Last week investors in FTSE 100 oil giant BP and medical device maker Smith & Nephew both voted down executive pay deals. Almost 60% of BP shareholders objected to CEO Bob Dudley’s £14 million pay package.
The report argues that executive pay is rising because of a “keeping up with the Jones” fear that it is rising at other top companies, and boards do not want to be seen to be underpaying their CEOs. The Group calls for pay to be more closely linked to performance, in line with wider pay policies for employees, and allow for more discretion from the remuneration committee, rather than simply based on a mathematical calculation.
The Group that drew up the report was chaired by Nigel Wilson, CEO of insurer Legal & General, which has £715 billion of investors money invested. Other leading business figures in the group include Sainsbury’s chairman David Tyler and City veteran Edmund Turell, who is currently advising Boris Johnson on pensions.
Wilson says in the report, according to The Times: “The FTSE is trading at broadly the same levels as eighteen years ago and 10% below its peak. However, executive pay over the same period has more than trebled and there is an increasing disparity between average wages and executive wages.”
Unusually, the Institute of Directors, which represents hundreds of top executives and bosses in Britain, has backed the Executive Remuneration Working Group’s report. Simon Walker, director of the IoD, says the current system is “failing” and there needs to be intervention to restore trust in the City between executives and investors.
It is increasingly clear that there is a problem with executive pay at big listed companies. The introduction of binding votes on pay policy has not had the kind of immediate and positive impact regulators and government would have wanted. Whilst some improvements have been made, the rebellion over BP’s remuneration report last week has shown that there is still considerable shareholder unhappiness.
Today’s report is a timely and important intervention in the debate around how remuneration is designed. We are pleased that the report has called for pay-setting to recognise company performance, be clear and simple, and aligned with shareholders’ interests.
Importantly, the report also recommends that pay policies for senior executives are consistent with the approach for other employees. This is a worthy intervention that, if adopted by the market, could go a long with to restoring trust in our largest companies. The current approach to executive remuneration is failing.
Tom Gosling, head of pay, performance, and reward at auditor PwC says in a statement: “There’s still the formidable challenge of getting wide-spread acceptance for the proposals from investors and proxy voting agencies. If this can be done then we could see real benefits from these proposals. If not then they won’t amount to much.”