The issue of what to do about high executive pay — and in particular the disparity between it, share performance and the salary of an average worker for the company — is one that governments across the world have been attempting to tackle for years.
The issue has become more pressing since the financial crisis, with mounting public anger, not just against companies in the financial services sector, but elsewhere too, where salaries at the top have continued to rise despite a sluggish performance.
The EU estimates that while shareholder value for the largest 10,000 companies fell by around 34 per cent between 2006 and 2012, executive pay rose by 46 per cent.
Individual countries have attempted to legislate on the issue, including the US (through the 2010 Dodd-Frank Wall Street Reform Act that contained many of the post-financial crisis reforms), Switzerland and most recently the United Kingdom.
However, the most sweeping response could come from the European Union, which is proposing to introduce a full-fledged “say on pay” for all companies listed in the region.Pay ‘checks’
While the EU has sensibly steered clear of introducing a cap — that many feared it would — it will require companies to disclose information “clear, comparable and comprehensive information” on their remuneration policies, on which there would be regular binding shareholder votes, as well as an annual vote on actual remuneration for that particular year.
The policy would have to include a number of details including maximum executive pay, and why it is put at that level.
Crucially, companies would have to publish and explain the ratio between the salary of an average employee and executive pay. Actual yearly remuneration would have to comply with this policy.
The EU has pointed to the success of a “say on pay” — both through binding and non-binding votes — on curbing excesses. Spain, which introduced an advisory vote in 2011 saw executive pay fall 10 per cent that year (when the average share price fell 5 per cent), having risen by 26 per cent in the preceding five years despite a 40 per cent share price slump.
By contrast, France, which has no such policy, has seen the pay of directors rise by 94 per cent between 2006 and 2012, despite the average share price falling 34 per cent.
In Britain, binding say on pay legislation has just come into effect — though its impact is yet to be seen. (Some campaigners have already complained that some companies are not complying with the disclosure requirements in full).A matter of perception
However, campaigners warn against expecting too much from shareholders.
Particularly in a context where institutional investors dominate, there is often limited incentive to challenge pay levels, they argue. “They also profit from a culture of high pay and are often subject to similar short-term performance conditions, so are not really incentivised to press for change,” says Luke Hildyard of the High Pay Centre, a UK think tank that monitors high pay levels.
In Britain, where institutions make up around three quarters of shareholders, aside from limited periods such as the “shareholder spring” of 2012, which saw the exit of several chief executives off the back of advisory votes against remuneration policy, executive pay has by and large gone unchallenged.
Most recently, Barclays’ remuneration report received sufficient shareholder support to be approved, amidst public and political criticism as its bonus pool rose 10 per cent in a year that profits fell by a third.
However, there’s still much that is useful in the EU report. The requirement that companies disclose, and justify the ratio of average salary to executive pay is one that campaigners are particularly positive about, in a current context where such figures are hard to come by.
The public disclosure, if nothing else, is likely to put pressure on companies to curb the worst excesses.
The legislation also attempts to tackle one of the biggest challenges of any effort to curb excess pay and other governance issues: encouraging shareholders with a wide range of motivations for investment, short and long term, to take a more active role.How to fix it
The European Commission proposals would increase the responsibilities of investors such as pension funds and their asset managers, in terms of their engagement with companies and communication regarding this, though even they admit there is only that much that can be done, given the varied nature of investors.
One option (which isn’t being introduced) would be to require pension funds and other institutions where ordinary members of the public are involved, to be forced to publish their voting record.
Campaigners have pointed to other strategies that have helped keep pay in check, such as the German system where there is employee representation in the board and remuneration committees.
Such measures of course would require a wider cultural shift and would almost certainly have to spring from domestic campaigns rather than sweeping EU legislation. However the biggest block to it all could be enforcement and plugging loopholes.
European banks have already shown them selves adept at getting around the EU rules designed to curb banker bonuses to 100 per cent of salary (or, with prior approval, double that).
In Britain, several banks allocated senior bankers fixed pay allowances, given as shares every few months, to ensure that their overall pay packages remained the same.
What routes will be used to circumvent the new EU legislation remains to be seen but in the meantime the tricky debate on executive pay rumbles on.