Criticism Over Disproportionate Response
British Prime Minister Theresa May has been criticized for her plans to reform executive pay, with accusations that her proposal to introduce binding shareholder votes on CEO pay every year is a disproportionate response to the problem of high executive remuneration. A report from research group Big Innovation Centre backed by the Bank of England’s chief economist, Andy Haldane, says that the policy “would be likely to have many negative unintended consequences”.
The Problem of High Executive Remuneration
CEO pay has become a political issue in the UK. Remuneration at the top of large companies has grown much faster than that at the bottom, leading to frustration among workers and the general public. Since becoming prime minister in July, May has outlined a series of policies aimed at rebalancing the imbalances of pay and power at large corporations.
Big Innovation Centre Report
The report from Big Innovation Centre criticized May’s plans to publish pay ratios between CEOs and average employees, saying it does not account for natural disparities in pay in industries such as retail. In addition, the disclosure should meet public demands for transparency and explanation of the disparity between CEO pay and worker pay, but should focus on relative trends in actual pay and pay opportunity over time rather than on a snapshot ratio, according to the report. It stated that forcing companies to publish pay trends, rather than a single ratio, would make a better policy and added that simply publishing a ratio would not capture losses in deferred equity awards, which depend on the value of the shares. If the stock declines, so does the CEO’s overall pay.
Annual Votes on CEO Pay
The Big Innovation Centre report criticized May’s plan to introduce an annual vote on CEO pay, stating that it would place undue focus on CEO pay and create additional burdens on companies; that it would be more appropriate to focus the policy on board performance and stakeholder representation.
CEO Pay Ratios
The report highlighted that comparing the single ratio of CEO pay to that of the average worker is an issue, as the retail sector has a higher number of lower-paid workers than other sectors. Furthermore, the publication of CEO pay ratios could create increased friction between workers and management.
The Big Innovation Centre report argues that executive pay needs to be viewed in the context of workplace culture. A combination of low pay and short-term focus on returns can result in management putting too much emphasis on immediate results, often at the expense of employees. Changing workplace culture may be a better solution than excessive regulation
The UK’s Prime Minister’s plans to improve transparency on CEO pay ratios have been criticized for being too simplistic and unfair to certain industries, although the general principle of increasing transparency on pay has been welcomed. As the debate moves forward, there are likely to be many additional questions and concerns raised around achieving better balance between worker and executive pay.
Q1. Why is CEO pay becoming an issue in the UK?
CEO pay has become a political issue in the UK due to the rapid growth of executive remuneration compared to other areas of business, leading to concerns about fairness and equity in the workplace.
Q2. What are the risks of introducing annual CEO pay votes?
The Big Innovation Centre report claims that it may create additional burdens on companies and place undue focus on CEO pay at the expense of other factors such as stakeholder representation and board performance.
Q3. How might pay ratios between CEO and average worker be unfair?
The retail sector in particular has a higher number of lower-paid workers, which can skew overall pay ratios and lead to unfair comparisons between industries.
Q4. Can changing workplace culture improve balance between worker and executive pay?
It is thought that changing workplace culture may be a better long-term solution than excessive regulation, as a focus on employee value and satisfaction can provide a more sustainable and equitable working environment.
Q5. Will greater transparency around pay ratios improve workplace conditions?
The hope is that increased transparency will promote greater consideration and discussion around executive and worker remuneration, ultimately leading to more equitable workplace conditions and better outcomes for all stakeholders.