CBI warns government against blurring shareholder and management responsibilities on pay
High pay for executives can only be justified by excellent performance, but the government has the wrong focus in its proposals, says the CBI in its response to the Department for Business (BIS) consultation on shareholder voting rights.
On the link to performance, CBI Chief Policy Director, Katja Hall, said: “The CBI has been clear that executive remuneration must always be squarely linked to performance, and that this link needs to be made more transparent and in some cases strengthened. That is why we support the publication of a single figure for director’s pay. Only by first getting the facts right can we have a meaningful debate and enable shareholders to hold boards to account. For instance, last year pay for chief executives rose by an average of 10%, not 49% which has been widely reported.”
Hall added: “Companies should always demonstrate how executive pay links to company strategy. Recent claims that there is no link between executive reward and company performance are misleading.”
Figures gathered by the CBI show that the median rate of growth in profit for FTSE 100 companies since 2003 has been more than twice the median growth rate of chief executive remuneration over the same period*.
On the make up of remuneration committees, Hall said: “Remuneration committees have a crucial role in delivering reward that is linked to performance and the CBI will support measures that strengthen remuneration committees and underpin their independence. But we absolutely do not accept the myth of a ‘cosy club’ of business leaders setting pay for each other. The evidence shows that no two FTSE 100 executive directors sit on each other’s remuneration committees.”
On the role of shareholders and management, Hall said: “The challenge of how to improve transparency is best tackled through the UK’s corporate governance framework, but the government’s proposals unhelpfully confuse the roles of shareholders and management. If these responsibilities are blurred then the result would be shareholders micro-managing companies, which would lead to slower and less effective decision making."
She added: “These proposed changes are even more perplexing given the recent introduction of annual elections for all directors, including those on the remuneration committee. This gives shareholders the power to remove members of the remuneration committee if they are not satisfied with their actions."
On proposals for binding votes on remuneration, Hall said: “Any introduction of binding shareholder votes on remuneration should be on the principles of pay strategy, not on individual remuneration packages. This would allow shareholders to have their say on pay, without asking them to make decisions on specific pay packages, which is the role of the remuneration committee.”
On proposals for a higher threshold to pass votes on pay issues, Hall said: “The government’s proposals for a higher voting threshold leave companies at the mercy of activist minorities, or result in pay policy going against the wishes of the majority of shareholders. They would also apply a higher standard of control to pay than is placed on the buying and selling of the company which would be completely disproportionate.”
On proposals for binding votes on exit payments over 12 months, Hall said: “It is completely impractical to require boards to call an extraordinary general meeting or wait until the company annual general meeting to remove under-performing directors. Company management must be able to act quickly and decisively to remove underperformers, which would be impossible if shareholders had to be consulted. A more workable way to increase scrutiny would be to make exit payments subject to a backward looking advisory vote.”
A final word
“Reforms on executive pay should focus on greater transparency, stronger links to performance, bolstering the role of remuneration committees, and giving shareholders the right information and powers to hold boards to account.” - Katja Hall, CBI Chief Policy Director.
* The figures quoted are based on CBI research into remuneration realised for FTSE 100 CEOs, which includes salary, bonus and the exercising of options and vesting of shares granted in prior years.
Want to know more?
Title: CBI response to BIS consultation on shareholder voting rights, April 2012.
Availability: A copy of the CBI’s submission to the BIS consultation on shareholder voting rights is available at www.cbi.org.uk/media/1469003/cbi_response_to_bis_consultation_on_shareholder_voting_rights.pdf [downloads PDF].
The CBI is the “UK's leading business organisation, speaking for some 240,000 businesses that together employ around a third of the private sector workforce”. For more information visit www.cbi.org.uk.
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