A majority of MPs recently voted to keep the public sector pay cap at 1%. But although the government won the day and the cap remains in force, there is no doubt that there is increasing criticism of austerity and of the disparity in pay between those at the top and bottom of the pay ladder.
So, should risk managers have the issue of executive pay in their sights? David Pitt-Watson, an executive fellow at London Business School, does indeed think there can be business repercussions and has even claimed Britain’s ‘social contract’ is at risk. He said: “There’s an absolute consensus now that executive pay is out of control.”
The UK, then, may be in line for the most profound change. And according to Bloomberg data, only the US and Switzerland pay their chief executives more than the UK.
A lack of control is something risk managers will undoubtedly have concerns about. And whether they are advising a remuneration committee or a board directly, the corporate governance aspect of pay strategy need to be taken seriously.
The FCA’s remuneration codes cover aspects such as:
- Ensuring greater alignment between risk and individual reward
- Discouraging excessive risk taking and short-termism
- Encouraging more effective risk management
- Supporting positive behaviours and a strong and appropriate conduct culture within firms.
Are LTIPs doomed?
But while these goals are right in theory, the reality of business life can be very different and businesses will argue there is strong competition for the best leadership talent.
Long-term incentive plans (LTIPs), deferred performance related awards that are paid in shares, are used by many companies, including those in the FTSE 100.
But, these were criticised by think-tank The High Pay Centre, for creating ‘perverse incentives’ that encourage executives to be too focused on earnings. Since contracts are typically based on relatively short, three-year performance targets, it has been shown that CEOs are not always taking actions that are in the best long-term interests of the business.
Risk managers should be mindful that there is growing pressure for change. Industry lobby group, The Investment Association, has suggested replacing LTIPs with restricted shares, which are batches of equity that must be held for five to seven years or more, with few or no performance conditions attached.
Meanwhile, in April, a cross-party parliamentary select committee called for long-term incentive plans to be outlawed.
Last November also saw the publication of a green paper on governance reform. Proposed changes included more frequent binding votes by shareholders on pay and the obligatory disclosure of ratios comparing the pay of chief executives to rank and file staff.
It remains to be seen whether the topic will be revisited but increasingly vociferous investor groups and the broad public mood suggest it will. Whether it was the vote for Brexit or in the US, voting for Donald Trump, there is a growing sense that many ‘ordinary’ workers are frustrated.
Addressing public concerns
Marcus Smith, managing director at the Reputation Institute has said he believes there will be more consumer campaigns against corporate greed and that public perception of pay deals matters – because when it turns sour, there is a clear risk to a company’s reputation.
For risk managers, the correct structuring of more ethical remuneration deals and ensuring these are correctly communicated, is set to become a core area within governance.