Taskforce’s 'radical rethink' seeks to rebuild public trust

Business representatives, including from the Bank of England, London and Saïd Business Schools, have offered their views on the UK’s post-Brexit executive pay landscape in a new report from the Big Innovation Centre.

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Publication of the interim independent report, The Purposeful Company, bookends a week where prime minister Theresa May announced in a speech to the CBI annual conference on Monday a new green paper on corporate governance.The new government review will cover employee voice, executive pay and shareholder accountability, and seeks to help restore public faith in business and policymakers in a post-EU referendum era, as well as defend what Theresa May said was the UK's excellent reputation for good business practices.

The Purposeful Company

Describing the need for the research and practice network Big Innovation Centre’s Purposeful Company Taskforce, Clare Chapman, taskforce member, non-executive director of Kingfisher, and Heidrick and Struggles said:“We support the government's objectives of rebuilding trust in executive pay, ensuring it is linked to long-term performance, and giving shareholders the right powers. Radically rethinking how pay can support long-term behaviour is now the imperative and this report can be a huge accelerator for boards wanting to adapt quickly."The report argues companies need to remove incentives to short-term behaviour, and measure CEOs and their performance based on “truly long-term performance, and aligning targets with non-financial and strategic measures rather than short-term financial goals.”

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Four key proposals

Coming a day after the IFS warned of a further dismal wages outlook for UK workers for the next five years, the taskforce’s interim report finds current pay practices encourage short-term behaviour and affirms “action is required to rebuild trust in how executive pay is set and governed.”“Executive pay is a matter of profound and legitimate public interest,” commented Andy Haldane, taskforce member and chief economist of the Bank of England. “Pay practices can encourage short-term behaviour in ways which harm both firms and the economy over the long-term. Moving pay practices in non-financial firms towards those in financial firms can help in tackling those problems."

Simpler pay structures

The taskforce offers four evidence-based proposals that "reframe" government plans to implement binding annual shareholder votes on pay and the publication of pay ratios.The first recommendation is for companies to adopt simpler pay structures, reducing the reliance on traditional performance pay, while focusing on higher and longer term shareholding extending at least five to seven years, depending on the sector.Pay packages should also result in CEOs being able to rapidly build up shareholdings worth twice the value of bonuses that can be awarded in any year, the taskforce proposes. Cash bonuses should also be limited to at most 25 per cent of incentive pay, and based on non-financial and strategic goals rather than financial measures, it suggests.

Fair pay charter

Building on the government’s interest pay ratios publication and employee voice, which Theresa May pledged to pursue, the Purposeful Company taskforce proposes instead companies should be required to adopt a Fair Pay Charter.This charter would set out a company's principles on pay fairness, trends comparing CEO and wider workforce pay over time, and a “requirement to engage with employees on its content through an appropriate forum.”

Pay for performance?

The taskforce also believes executive pay reporting rules should be amended to provide a fuller picture of how CEO pay is linked to performance. This includes:
  • disclosure of the change in CEO wealth over the year, including previously awarded shares, compared with the change in the value of the company
  • the impact of share price growth on the report value of payments made for the year
  • the requirement for a clear maximum on each element of pay.

Extension of shareholder voting rights

Its final recommendation is for shareholder voting rules to be extended so a company that loses its remuneration report vote, or receives a vote below 75 per cent two years in a row, would be required to bring their remuneration policy back for binding approval as a special resolution requiring 75 per cent support.Will Hutton, chair of Big Innovation Centre Steering Group, which hosts the Purposeful Company Taskforce, taskforce member and principal of Hertford College, Oxford, said: “In my view, this is the most robust attempt yet to set out an evidence-based manifesto for executive pay reform - plainly much needed.“These are feasible proposals – reframing but similar to those the government has floated – that if adopted could really move the dial on executive pay, link it more to the achievement of purpose and innovation, and allay concerns in business and wider society that executive pay needs to be reassociated with business and social realities.”

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