BUSINESS secretary Vince Cable does not mind ruffling a few feathers. After getting involved in rows ranging from gunning for Rupert Murdoch to tax avoidance, his most recent target has been executive pay.
A rash of reports has measured the continued increases in directors’ remuneration. One report, from Income Data Services, showed that CEOs have enjoyed on average an increase of 43%, while FDs are not far behind, on 34% (all data in the IDS Directors’ Pay Report is taken from the latest available published annual accounts with year-end dates between February 2010 and April 2011).
Under the new plans unveiled on 23 January, there are four central planks: improving the transparency of remuneration reports; giving shareholders a binding vote on executive pay (a step up from the current advisory system); encouraging greater diversity of board directors; and requiring businesses to institute clawback provisions on bonuses. One provision in particular – the publication of a single number for executives’ pay – was trailed as a major step forward in improving the clarity of what exactly companies currently pay.
Witch-hunt on pay
The proposals drew a predictably mixed response. The Confederation of British Industry’s (CBI) director-general John Cridland spoke of a witch-hunt on executive pay, while the TUC general secretary Brendan Barber bemoaned Cable’s failure to “make any significant changes to the status quo”. For its part, Labour said it would go further and mandate an employee presence on remuneration committees.
Some of Cable’s recommendations deserve a cautious welcome, said Nicki Demby, global remuneration partner at Deloitte. “The positive element is the greater transparency, which is – crucially – required of everybody, about why and how much they pay,” she said. “So that’s very good indeed, and any improvements in transparency around the process – the rationale behind pay deals, the outcomes – is good.”
It is Deloitte’s contention that transparency benefits businesses beyond simple compliance – it makes for better decisions on pay packages.
“For example, if you make a set of decisions as a remuneration committee, and if you know you’ll have to report them, then you will think twice about how it’ll look when you do,” Demby said. “Boards and remcos will have to ask how they will explain it to the shareholders. So it should in theory improve the quality of decision making and that’s why we support it – it’s not transparency for its own sake, but that it improves the quality of decision making.”
Demby was less sure of the reasoning behind the other proposals. “We don’t think some of the suggestions will necessarily improve the quality of decision making,” she says. “So things like the proposal for a binding vote: no-one knows what that vote will be on yet but it may take the form of a binding vote on termination packages, and that could bring problems.”
Meanwhile, Cable’s determination to give shareholders greater control over executive remuneration, specifically altering packages already agreed and promoting the use of clawback, will encounter significant obstacles, according to one eminent employment lawyer.
“There’s nothing dubious about the defence of contractual obligation,” said Tom Flanagan, national head of employment at Irwin Mitchell. “A lot of the problem behind the idea of government and shareholders having more power over how much people are paid is that they can’t do much about what’s already been agreed.”
In Flanagan’s view, the Cable proposal could open a can of worms by allowing shareholders vetos over executive packages.
“Sooner or later, people who have been singled out for criticism as an example of greed will demand to be paid what their contract stipulates and they will sue for it,” he said.
Flanagan suggests an alternative to employees or shareholders blocking packages would be for boards and remcos to change the way in which they structure bonus packages.
“You could have ‘variable termination clauses’ but it would be difficult,” he said. “But you could say the employment could be terminated with no notice and no payment will be made if, in the opinion of the board, you haven’t performed. We might see that beginning to happen.”
So far it is unclear what, if any, specific impact the proposals will have on FDs. David Cookson of headhunters Russell Reynolds believes that the transparency measures will have little immediate impact.
“Given the role that FDs now play as a partner to the CEO, they have to be comfortable having a City profile, so having their remuneration disclosed is nothing new,” he said. “It goes with the job.”
Cookson did point out, however, that for many FDs, particularly those outside banking, “Money isn’t the motivator when it comes to choosing a role, so whether any curbs on directors’ pay would affect them isn’t clear”.
“We’ve not heard of any FDs reacting negatively to this so far,” he added. “They might not be supportive, but there’s no uproar from the FD community over this issue. It’s also year-end at the moment so they’re probably too busy.”