MP Briefing Calls for Shift in Focus of Executive Pay Debate

Wednesday, March 14, 2012
Richard Mabey

In a 5 page briefing paper sent to all Conservative MPs, the Bow Group argues that the Government must go further in tackling issues around executive pay. Alongside an analysis of the Government’s response on the issue to date, the Bow Group argues that a more proactive approach can turn divisive public opinion into meaningful empowerment.

The briefing argues that the executive pay debate is about income inequality: the difference between those at the top and those at the bottom. In tackling income inequality, you can regulate the top but, far more importantly, you also need to empower those at the bottom. The Bow Group welcomes the Government’s response of empowering shareholders to regulate excessive pay. However, the Government must also tie in this market response to a more proactive social agenda.

Broadly echoing the views of the Business Secretary, Vince Cable, the Bow Group believes that the Government needs to be thinking ahead. Ultimately public anger on this issue has stemmed not so much from a displeasure with the market, but a creeping sense of dissatisfaction for social prospects in Britain. With declines in social mobility in recent years, responding to public anger must take into account the barriers that have been created in getting to the top. It is only in this way that the Government will truly regain the initiative from Labour on this vital issue.

Of the Government’s response so far, the report finds, in particular:

- The allegation of mutual back-scratching by non-executive directors has been massively over-exaggerated by the media - only 6 per cent. of FTSE 350 non-executives sit on the boards of other FTSE 350 companies.

- The proposals only apply to companies with a listing on the main market and do not apply to the setting of pay in hedge funds or other private institutions.

- The single figure of directors’ pay at listed companies makes for a good headline but will ultimately be self-defeating (estimating share-based rewards is something of an art, as the value of shares varies over time).

- The Government must recognise that golden parachutes are not an ill in themselves. The mooted threshold for reporting on golden parachutes (payments exceeding 1 year’s salary) are far too low, as this will catch almost every golden parachute (which was not the stated aim of the reform).

- Proposed reform to employee engagement in the setting of pay mostly rehashes existing legal rights and does not lead to any further empowerment.

The Bow Group proposes instead:

- Employee engagement in setting pay will restore confidence in the system. The Bow Group would not go as far as to place an employee on the remuneration committee of listed companies but suggest instead that a ‘best practice’ employee forum for listed companies should be imposed.

- The single figure in setting directors’ pay should not make it into regulation - instead the framework of the Directors’ Remuneration Report should provide for pay to be meaningfully broken down into the constituent elements of pay.

- To win the debate, the Government needs also to tackle the wider social issue, which is not so much that executives are getting paid to much, rather that those at bottom end of the income scale are subject to heavy barriers to social mobility. This is the underlying cause of public anger around the subject and the Government can win much credibility by tying in their social agenda with the useful market reforms they have already proposed.

Download the full paper below.