Lisa Weaver, author of accountingcpd.net’s Corporate Governance, reacts to The High Pay Commission’s "Cheques with balances: why tackling high pay is in the national interest" report and how it relates to good governance.
by Lisa Weaver
The High Pay Commission this week published its latest report entitled "Cheques with balances: why tackling high pay is in the national interest". Deborah Hargreaves, chair of the commission commented that there is "a crisis at the top of British business and it is deeply corrosive to our economy. When pay for senior executives is set behind closed doors, does not reflect company success and is fuelling massive inequality it represents a deep malaise at the very top of our society.”
The report argues that the disparity between the pay of senior executives and that of "average workers" has increased dramatically in the last 30 years, quoting numerous examples. For instance, at Barclays, top pay is now 75 times that of the average worker, whereas in 1979 it was 14.5 times.
The issue of executives' pay has long been debated by those interested in corporate governance. It is clearly a conflict of interest when executives can determine their own remuneration packages, and good governance principles require the use of an independent remuneration committee to fix salaries, bonuses and other means of compensation for executives.
A report issued by Income Data Services in October highlighted that in the UK directors' pay rose by 50% in the last year. This is barely credible given the economic distress that many companies have found themselves in for the past few years, and it is hardly surprising that the issue is making headlines, and not just in the business pages.
David Cameron commenting on the IDS report stated that "There are three important principles here, transparency, accountability, responsibility". Interestingly one of his main themes in discussing high pay related to the "closed shop" that operates with respect to remuneration committees. He suggested that there are few suitable candidates to join remuneration committees, implying that the members are therefore not objective when determining executive pay. He hopes that by encouraging more women to become non-executive directors and join remuneration committees this closed shop will open up and become more independent from main boards.
This is a good idea in principle, but will take a long time to have any effect. In a time when thousands of "average workers" face pay freezes and redundancy it would seem that executives’ high levels of remuneration will continue to cause anger, despite the best intentions of corporate governance principles.
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