Business leaders reject proposed executive pay reforms

Prime Minister Theresa May has been urged to rethink her approach to reform of corporate pay and governance in the UK, just days after backtracking on proposals for worker representation in the boardroom.

A report published on Friday last week by the Big Innovation Centre, an independent think-tank, argued against annual binding votes on executive pay and a requirement to publish the ratio between the pay of the CEO and the average worker in the business.

The prime minister made corporate governance reform one of her priorities when she came to power in July, expressing concern over “an irrational, unhealthy and growing gap” between the pay of workers and executives.

The new report — whose contributors include leading corporate figures and the Bank of England’s chief economist — agrees that action on pay is needed to change executive behaviour and to “rebuild trust”.

But it says that binding votes and pay ratios are the wrong way to do it, and would damage efforts to retain and motivate chief executives.

“Pay ratios do not lend themselves to valid comparisons between companies, even within the same industry, and would likely add to misunderstanding over executive pay as well as potentially creating perverse incentives,” the report says. It adds that pay ratios may lead to pay being decoupled from performance.

The authors also claim that binding votes would be a “disproportionate response… and would be likely to have many negative unintended consequences”.

Instead, the report suggests that if a company’s pay policy receives less than 75% support in two consecutive years, the vote should become binding.

Other recommendations of the report include “simpler pay structures” for CEOs based on long-term equity and debt holdings to encourage long-term behaviour.

Clare Chapman, remuneration chief of B&Q owner Kingfisher, quoted by the Financial Times, said: “Radically rethinking how pay can support long-term behaviour is now the imperative and this report can be a huge accelerator for boards wanting to adapt quickly.”