You know things are pretty bad when a new Prime Minister, speaking to the nation for the first time from outside the door to 10 Downing Street, singles out poor corporate governance and excessive executive pay as a key problem for the country.
This is what Theresa May did back in June. A few days later, but totally by coincidence, the Chief Executive of Legal & General, Nigel Wilson, published a report
aimed at improving the way executive pay is set and communicated.
Though upstaged by the PM, the pay project was something on which he had been working for months along with a small group of high powered individuals, including Helena Morrissey, the Chief Executive of the investment management firm Newton, Sainsbury’s Chairman David Tyler, and Edi Truell, the private equity specialist who has been heavily involved in the continuing reorganisation of local authority pension funds.
To get the input of such a heavyweight group underlines the fact that the business and investment communities understand they have a serious problem. One would have thought, therefore, that what Wilson recommends would carry weight and generate considerable debate.
But thus far the response has been muted.
This silence is instructive. It is of course true that it is hard to get any debate going in July and August and harder this year than most with the media’s attention so heavily focused on Brexit. But perhaps too there are signs of pay fatigue – people are unwilling to make the effort to engage with another set of proposals on pay because they do not believe they will make any difference.
You can see why they might be cynical. One of the fathers of UK corporate governance, Alistair Ross Goobey, once compared executive pay to the caucus race in Alice in Wonderland
. His message was that “no one knew where the race began; no one knew where it finished; but everybody always gets a prize”.
Why is this relevant? Ross Goobey died in 2008. This is hardly a new debate. And pay was a lot less excessive ten years ago than it is today.
The Wilson recommendations are, in fact, all very sensible, focused as they are on transparency and simplification. They want remuneration committees to make sure they have properly experienced chairs, willing to engage fully with the whole board, which then has to properly buy in to what has been decided. The Remco should also be more prepared to use its own judgment, not simply parrot the script of remuneration consultants.People are unwilling to make the effort to engage with another set of proposals on pay because they do not believe they will make any difference
Wilson’s group thinks incentive schemes should not be the current formulaic one-size-fits-all, but instead be tailored to individual companies and closely integrated with strategic needs. The whole exercise should be surrounded by much more transparency, with a willingness to justify the total amount which could be paid, to explain what the targets are, and why they are relevant, and to show retrospectively how they were met and what awards they triggered. Part of this is not blindly aiming for a pay benchmark in the upper quartile, or even above the median benchmarks so as to lean against the automatic upwards-only ratchet of pay wards.
A key purpose behind Wilson’s work was to create an environment in which high pay would lose its corrosive impact on public trust in business and it would then begin to rebuild. There are powerful voices however, including from the Institute of Business Ethics (IBE), willing to say it is nowhere near bold enough.
Writing to Wilson when the report was initially out in draft, the IBE director Philippa Foster Back said bluntly that “the debate needs to encompass more radical changes than those discussed in your report” and went on to list four questions every remuneration committee should be able to answer:
Why have we chosen the level of quantum proposed and can it really be justified?
- Can everybody – boards, executives, shareholders – clearly see the value of what is being handed over?
- Will the award stimulate the executives to pursue a long term strategy that is in the interests of the shareholders and the company?
- And finally, will the broader public be able to see a clear connection between performance and the eventual outcome?
This led to one final point: “Until remuneration committees can always answer these questions, we will continue to have problems with executive remuneration which feeds into rising voter concern with inequality on both sides of the Atlantic. We believe the problem is urgent and more serious than your report suggests.”
In fairness, Wilson’s hands were tied by terms of reference that required him to propose refinements to the system that would not need legislation. This does, however, mean his report has focused more on improving the mechanics and the optics of how the process works, when the real cause of public disquiet is simply that the pay is far too high, however transparently it is arrived at. Thus this report, while it may be a step on the journey, is a long way from offering a final solution.
Look out for Anthony Hilton's First Person column in the October 2016 print edition of The Review.