Submitted by Ali Saribas, U.K. Research
The U.K. High Pay Commission, the independent body tasked to inquire into the escalating gap in the remuneration received by top executives and average employees across the public and private sectors in Britain, has published its much anticipated report, “Cheques With Balances: why tackling high pay is in the national interest.”
The aim of the commission was to explore and understand the drivers behind the widening gap in pay. Opinions on the report have been mixed, some observers citing that the report did not reveal anything new and that in some cases top pay could be justified whereas others have viewed the recommendations made by the commission to be worthy and reasonable.
According to the report, just in the past year, total executive pay at FTSE 100 companies rose on average by 49 percent, as compared with an increase of just 2.7 percent for the average employee. The 38-page report also provides some examples, such as the pay disparity at one of the U.K.'s largest companies, BP PLC. In 2011, the lead BP executive earned 63 times the amount of the average employee, whereas this multiple was 16.5 times in 1979.
The investigation concluded that excessive top pay is deeply damaging to the U.K. as a whole, and urgent action is required. Accordingly, the report includes 12 recommendations based on the principles of accountability, transparency, and fairness. Some recommendations of interest include the standardization of remuneration reports. With regard to disclosure, the High Pay Commission is also recommending that companies publish “fair pay” reports as part of their remuneration reports to build trust in pay policies. As part of these reports, companies would publish the pay ratios between the top-paid employee and company median over a period of three years to allow closer scrutiny of pay gaps.
Another recommendation is for companies to include employee representation on remuneration committees to improve engagement and accountability. The panel found that most remuneration committees are a "closed shop,” made up largely of current and recently retired executives, which contributes to escalating pay levels and ignores the constructive role that other stakeholders can have when properly engaged. Echoing the recommendations of the U.K. Stewardship Code of 2010, the High Pay Commission is recommending that fund managers be required to disclose how they vote on remuneration matters.
One of the more innovative recommendations is for shareholders to be provided with the opportunity to cast forward-looking advisory votes on executive remuneration. The High Pay Commission states that it has considered recommending making shareholders' advisory votes on remuneration reports binding but concluded that the preferred option would be to make the vote forward looking at this time. The commission therefore recommended that shareholders be allowed to vote remuneration arrangements for the next three years and that these arrangements include future salary increases, bonuses, and benefits. However, the panel cautions that further research should be conducted before this proposal is implemented to ensure that such a reform would encourage shareholders to vote against excessive pay packages and not increase the opaque nature of disclosure.