MPs must keep up the pressure over "shaming" bosses pay

A report by the Business, Energy & Industrial Strategy committee calling for reforms into the way executive pay is set has some good things to say but it could have gone further still

The pay packages of former Persimmon boss Jeff Fairburn and BT boss Gavin Patterson have angered MPs (BBC/AFP/Getty)

There was much to like about the Business, Energy & Industrial Strategy Committee's report into bosses’ pay, the “shaming” decisions some boards have taken, the out and out greed that undermines confidence in British business and, indeed, the very notion of free market capitalism.

Persimmon Homes paying its CEO a £100m bonus, later reduced, has become the poster child for everything wrong about the system of setting executive pay, but it’s far from being the only recent scandal.

Lesser ones have blown up as a result of events at BT, Melrose, Unilever, Royal Mail, Foxtons. They have all contributed to a feeling of anger and disgust that not only threatens to undermine social cohesion, but corporate cohesion too. Why go the extra mile if there’s scant chance of your sharing in the value you create while the boss gets a lottery win whatever the outcome?

The report has some good ideas about how to address this. It’s call for a more aggressive regulator to oversee corporate governance and replace the do nothing Financial Reporting Council (which is on its way out) is well made.

Remuneration committees ought to pay far closer attention to the ratio between bosses pay and workers’ pay, and the demand that they do so could be enforced by a new regulator. Institutional shareholders should have their feet held to the fire over their role as stewards, and again regulators may have a role to play.

It simply cannot be right, as the report notes, that bosses pay has increased at four times the rate of workers’ pay, driven by complicated share based long term incentive schemes that are rarely very long term, and fail as incentives through paying out handsome sums for mediocre performance.

This sort of thing also plays into the perception that economic growth doesn’t matter that much because it isn’t shared. It’s worthy of note that pay has fallen from a high of the the mid 60s as a percentage of the UK economy in the 1970s to the mid 50s today.

But while the report is more punchy than what Theresa May’s government has come up with to date, it isn’t as radical as the headlines would have you believe. It doesn’t go as far as, say, PIRC, the consultant which advises shareholders on voting decisions, would when it comes to a discussion on regulation and, crucially, the representation of workers on boards.

Its focus is also narrower than it might be. Ask yourself this question: Why is executive pay so high? The answer is that it is set by well paid non executive directors who earn generous fees for a couple of days work a month. The report notes that CEOs are often very good negotiators, so good that in some cases they basically set their own pay. If you’re a non executive director, witnessing the boss ride roughshod over your colleagues, are you going to make a fuss if it puts your fee at risk? Probably not.

The report has less to say about remuneration consultants, which are also appallingly well paid.

According to research by PIRC those advising directors of FTSE 100 companies received fees averaging £110,000 over their last year. But there are several who make more than £200,000 even £300,000. If you want to know why long term incentive plans are so fiendishly complicated, there’s your answer. When you have fees of that size to protect, you are also unlikely to want to annoy the CEO on whose pay you are advising.

The report notes that institutional shareholders have become more willing than they were to use the mechanisms at their disposal to vote against excessive pay.

But they passed the Persimmon package. They only objected when the media made a fuss.

Is it any wonder? As with non executive directors, and remuneration consultants, institutional fund managers are very well rewarded and so they are not always inclined to worry about the impact of excessive pay at the companies in which they invest.

Their rewards are often hard to justify when set against the performance of some of their actively managed funds. These people also quite like to pick up the odd non executive directorship or three when they get older.

Thus has a City circle of rewards for mediocrity, if not always failure, developed with little oversight. The committee could provide some with its future work. It is to be hoped that it keeps up the pressure.