The UK is cracking down on exorbitant executive pay. Ever since Theresa May made this a central issue in her 2016 campaign for office, businesses have been anticipating an ongoing battle, some proactively making internal changes of their own, and others preparing to lobby in defence of their current practices. Some new rules about executive pay disclosure have now been set to take effect in the near future, but further reform is still on the table, and businesses are digging in their heels.
Trends in Executive Pay
In 2016, the average take-home pay was £4.5m for top executives in publicly traded companies. In comparison, the average worker earned just £28,200, about 160 times less according to the BBC (BBC, 2018). The highest-paid boss in the UK, Sir Martin Sorrell, CEO of WPP, brings in a whopping £48m as reported by the Guardian. In a telling symbol of the public’s distress regarding massive amounts of money given to corporate executives, the third workday of the year has been dubbed “Fat Cat Thursday”. The BBC noted that on January 4th in 2018, top execs have already earned what the average employee will earn all year.
The general secretary of the GMB union, Time Roache, said, “It’s in everyone’s interest to tackle this inequality. The money earned by ordinary workers is not spent on luxury yachts or hoarded away in tax havens – it is spent in the high street and in the communities in which they live and work”.
Reforms Made to Date
Rules forcing large public companies to publish executive pay levels were rolled out in 2013. This provided a bit more transparency to shareholders, employees, customers, and government entities alike. Shareholders also began voting on executive pay every three years, but those votes were not legally binding for the companies, Farrell reported in the Guardian. These reforms were considered mere tokens by many, and public outcry over excessive executive pay packages continued into 2016.
Theresa May promised more reform would be forthcoming during her 2016 campaign. Just by virtue of the increased likelihood of government intervention hinted at during that campaign, and perhaps somewhat attributable to the token 2013 reforms, an immediate impact was seen on business practices throughout the country. Farrell noted in 2016 alone, average pay for top executives decreased by 19% from the year before, including all bonuses and other incentives. And salary increases of over 3% were cut in half. Yet, executive pay that would take an average worker about 160 years to make still didn’t seem like quite enough had been done to address public concerns.
November 2016 Green Paper Proposals
In further efforts to rein in business excesses, a green paper suggesting a variety of additional reforms was published in November 2016. Stewart of the Guardian noted. that according to political opponents, these plans ultimately lacked the teeth threatened during May’s campaign. The green paper did suggest publishing ratios of executive pay to employee pay, but it also warned about misconstruing this information, even though the average chief executive was earning 128 times the pay of the average staff member. The paper also suggested annual binding shareholder votes on executive pay, requiring companies to set caps on maximum executive pay, including employee representatives on company boards, and holding large private companies to the same standards like publicly traded companies on the stock market. But within each of these categories, a range of options was politely suggested rather than adamantly insisted upon.
Theresa May in a Difficult Position
Theresa May’s party receives some major backing from big businesses. Under their influence, she has softened her stance on employee representation on boards, drawing criticism from worker unions. On the other hand, about 900 public companies will have to start publishing AND justifying, the chief executive to average worker ratios in the near future, so May is facing criticisms from the corporate world, as well.
Others look to be taking up the mantle in May’s wake. In November 2018, an independent report presented to the Labour party made some startling suggestions for further reform. The report suggests banning all stock options as part of executive compensation packages to force companies to act more in the interest of long-term company prosperity. It also recommends that customers, in addition to shareholders and employees, should be able to veto pay packages for top execs in order to keep them focused on customer needs and quality rather than just profits. It also calls for a total ban on golden parachutes bequeathed to parting execs. To further levels of transparency, this report even says that companies with over 250 employees should report the names of everyone, not just executives, that earn over £150,000 per year according to the Financial Times.
Of course, opponents of any further plans to rein in corporate excess levy some harsh criticisms. They feel these proposals are outright attacks on capitalism and will seriously hamper corporate decision-making, effectively crippling the free market and severely damaging economic growth. According to the critics, shareholders and boards of directors are already in a position to ensure appropriate compensation practices. But if the Labour party, which came very close to winning the 2017 election, supports radical reformations, businesses can’t afford to discount them entirely.
Sam Dumitriu of the Adam Smith Institute think-tank makes an interesting point, Not only do CEOs make crucial, business-altering decisions on a daily basis but if they are paid at lower levels in the UK than they could command elsewhere, UK companies may lose top executive talent to the US and Europe.