Investors, not workers, should set boardroom pay
If David Cameron needs to make a political gesture on boardroom pay it is better that he gives shareholders the veto than allows workers to decide the directors’ remuneration.
Investors in quoted companies currently vote on the remuneration report but it is only advisory - a chance to show disquiet rather than an opportunity to block pay awards. By the time of the poll is taken at the annual meeting, the bonus is likely to be in the board members’ bank or the pay-off will have been paid.
But – despite calls from Labour, the TUC and the self-appointed High Pay Commission – there is no case for employees sitting on remuneration committees. Until private firms are run by workers’ communes, it is the job of the board to make the decisions and to be slated for getting them wrong.
However, having made one sensible decision, the rest of Cameron’s response is rhetoric. He wants more transparency on pay when remuneration reports already spell out every penny paid to directors, all long-term bonuses and short-term incentives, each perk and pension and any payments in kind. That can be the best part of 100 pages of transparency and the result is opacity.
Which is probably why a baffled prime minister wants simplicity on board pay. But that creates anomalies. It is by tying pay to a complex matrix of benchmarks and targets that remuneration is more likely to be aligned to performance: strip down the variables and directors will be paid when their company fails.
And ratios of top-to-bottom pay are plain daft. The firm that outsources production abroad will compare board pay to mid-level clerical salaries; a similar firm making its own goods will relate top pay to the shopfloor and thus have a worse differential even though it has maintained UK jobs. The ratio shows nothing of significance.
The way the wind is blowing means these moves on disclosing pay will become law so companies may as well accept them. But it is highly unlikely they will do anything to reduce unwarranted pay levels – any more than today’s transparency has.
Shareholders have rejected very few remuneration reports so it seems unlikely they will block pay awards. But investors are just as capable of acting maliciously as shopfloor representatives on remuneration committees would be. At some point the City will, like the prime minister, feel it must make a political gesture and some company will thus have to work out how to undo a directors’ pay award.
