The consultation paper on executive pay launched by the Department for Business, Innovation and Skills last month included proposals to force firms to put staff representatives on remuneration committees to help curb the worst excesses of executive pay and provide a better link between boardroom pay and that of the wider workforce.
Business secretary Vince Cable supports the plan, while Labour leader Ed Miliband also came out strongly in favour of the idea at the Labour party conference, adding to the impression that the policy is gaining momentum. However, experts say the idea is impractical and unrealistic.
Sean O’Hare, reward partner at PricewaterhouseCoopers, has said
“The first practical difficulty is how you go about electing an employee representative,” said O’Hare. “If you are talking about a FTSE 100 firm with 300,000 in 70 countries, are they really saying they would be elected by all employees? If so, you are going to have to put in place a mechanism that will cost a huge amount of time, effort and translation costs. If they are not saying that and the representative would only apply to UK employees, then for many London-listed FTSE firms that person would be representing only 10 per cent or less of the workforce.”
There are also questions about who would really want the job, how they report back to staff and what their mandate would be. If the employee representative was one voice in a typical remuneration committee of four, they might find themselves regularly outvoted, he added.
“Non-executive directors are there to be independent of mind and to exercise their own judgment – would this be the case for the rep, or would they feel they have to reflect employee opinion?” he asked. “Another concern is that if they are only on the remuneration committee and not the board, they would always have to be brought up to date on events and could become second-class citizens on the committee.”
Duncan Brown, principal for talent and reward at Aon Hewitt, said that the examples of Germany and Austria were often cited by those in favour of the idea, but that those countries have a different corporate governance framework. Employee representatives there sit on a supervisory board that one member of the main board has a duty to consult with.
“I support the principle, evident in recent financial services reforms, of broadening the brief of the remuneration committee to look beyond the board,” said Brown. “In the past there has been criticism – some of it justified – that the independence of these committees means they can be cut off from the rest of the organisation and won’t know what is going on with the rest of the workforce. That has improved, and I have seen a number of remuneration committees put in place yearly updates from HR, for example, to keep members informed. But I don’t think just plonking an employee rep on the committee would work.”
CIPD reward adviser Charles Cotton said a reorganisation along German lines would be even more unlikely.
“It would mean rewriting the UK corporate governance structures – all to solve a perceived problem with executive pay. Before acting the government must decide what problem it is trying to solve. While there are concerns about ‘groupthink’ at board level, and remuneration is part of this debate, there are other, simpler ways of raising diversity at board level.”
One of the few large employers to have an employee rep on its board – albeit not the remuneration committee – is FirstGroup. Its group reward and pensions director John Chilman said that, while staff representation at such a high level can provide “reassurance” to employees, he would not be in favour of it being made compulsory for remuneration committees.
“I prefer to look at the underlying problem – if the concern is about CEO reward, and the multiple with other staff being unfair, let’s do something about that,” he said. “Where remuneration committees suffer from a collective weakness, it is because the non-executive directors don’t have the knowledge, experience and time to really challenge in this specialist area. Putting in an employee rep will not necessarily address that.”
Whilst it is agreed that something must be done about excessive pay awards for under-performing executives, the solution lies in addressing the problem of poor corporate governance within our large organisations not in tinkering with the composition of remuneration committees.
Non-Executive directors are appointed to Boards to take into account the interests of all stakeholders – not just shareholders and if they exercised their duties responsibly then under-performing executives would be removed rather than rewarded.