Is legislation the answer to curbing pay?

I worry that any new regulation is just pandering to perceptions

By Michelle Perry | Published 11:43, 24 January 12

Legislate“It is encouraging that some of the heat has been taken out of this issue,” the CBI director general said following Vince Cable’s announcement on Monday of a package of proposals to curb excessive executive pay.

But I doubt it has. It may well have quenched the over-exuberance of politicians of all parties to be seen to jump on the bandwagon of fat cat pay.

These proposals are now subject to further consultation before secondary legislation is published later this year, and despite support from business groups and advisers, I suspect differing views will be voiced in the coming months.

Some of Cable’s proposals are indeed practical and practicable but it remains uncertain if they will tackle instances of exorbitant pay. For instance, the suggestion for companies to report a single figure appears fairly straightforward but there are already concerns that this could be misleading.

“Depending on the way this number is determined, it has the potential to be misleading and unhelpful,” says Carol Arrowsmith, partner in the remuneration team at Deloitte.

Some of the measures have already been adopted by some public companies, such as claw-backs and deferred pay to avoid incompetent chief executives such as Sir Fred Goodwin departing with their very generous pension in tact.

Shareholders have already suggested that a binding vote on executive pay may have little effect at all. Dr. Roger Barker, head of corporate governance at the Institute of Directors who said that “A binding shareholder vote … will remind institutional investors of their key governance responsibilities” sums it up perfectly. “Remind” is the critical word here. It will remind them but will it encourage them to act?

Investor bases have become increasingly diverse, with more and more foreign shareholders, so it’ll prove difficult to build any broad agreement and easier for companies to ignore shareholder complaints.

I was recently interviewing a chief financial officer of a large public company who cautioned against new legislation. You might argue well ‘yes he would’ as it’s like turkeys voting for Christmas. But this is a CFO who also recently took a larger than 10 percent pay cut, along with the management team, when they were forced to cut staff salaries by 10 percent.

“It’s very important that we take the same medicine, otherwise we just don’t have the moral authority,” the CFO told me.

More importantly, the finance chief said that shareholders already have at their disposal all the tools they need to hold boards to account. The problem is about ensuring that shareholders are more active, the CFO said. So what will new legislation achieve?

Ministers have offered little independent research to back up its beliefs that the issues they are aiming to tackle are in fact problems. Do they know how many shareholders opposed pay deals at public companies last year? Or how many FTSE directors sit on other board’s remuneration committees?

Soaring pay for poor performance serves no one but the lucky exec that walks away with a huge payout. But I worry that any new regulation is just pandering to perceptions with no hard evidence to back it up. The government wants the public to know that they’re spreading the pain of austerity.

All the tools investors need to veto executive pay are widely available to them. Investors just haven’t been taking advantage of them.

The only one concrete change that might achieve the goal of more inclusiveness – that of including an employee on remuneration committees of public companies, as many German companies do – was not included in the package of measures.

The CBI chief said it “makes sense” not to include an employee on the board as “every good company involves its staff in how the business is doing, but boards must be the representatives of business owners”. Again, notice the qualifying adjective “good”. It’s true all good companies work to benefit all its stakeholders, but what about the bad or simply mismanaged companies?

A push for more diverse boards to avoid ‘group think’ is also one of Cable’s measures. The business secretary said no executive of a FTSE company should sit on the remuneration committee of another company. But where’s the evidence to suggest that this is a problem. Privately board members have told me that this is not the case.

Still, Cable’s proposal that all remcos should disclose how they have appointed, used and paid consultants to advise them on executive pay would be an effective measure. But does this need legislation?

Independent research needs to be conducted on every aspect of the proposed measures before any legislation is enacted or else we run the risk of unintended consequences that effect no positive change in curbing excessive pay.


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