UK High Pay report recommendations look set to influence govt. action on investors

Shareholder/pay consultation ends this Friday as commission cites ‘deeply damaging’ excesses.

The UK High Pay Commission today set out a list of 12 recommendations that look likely to influence the government’s thinking on regulating the relationship between shareholders and rising levels of executive pay. In its report, the commission, whose six commissioners include Brian Bailey, director of pensions for the £8bn West Midlands Metropolitan Authorities Pension Fund and Robert Talbut, Chief Investment Officer, for Royal London Asset Management, said excessive top pay had become “deeply damaging” to the economy and that urgent action was required to address it.
A government consultation on executive pay and its link to company performance closes this Friday with recommendations to be made early next year. Vince Cable, Secretary of State for Business, Innovation and Skills, said the government was considering many of the regulatory options outlined in the High Pay Commission report: “In the last decade we have seen extreme increases in top executive pay which appear to be completely unrelated to the performance of companies. They are therefore acting against the interests of shareholders and consumers.” The High Pay Commission was established by Compass, a left-of-centre political think-tank with the support of the Joseph Rowntree Charitable Trust. Its report said executive salary growth in the ten years to the end of 2010 bore no relation to market capitalisation, earnings per share or pre-tax profit. It said it found a slightlycloser relation to executive pay and total earnings, pre-tax profit and earnings per share, but that the trend diverges significantly during certain periods. Over the ten-year period, the report found that within companies listed on the FTSE 350 index, the average long-term incentive plan for directors had risen by 253.5%, bonuses by 187% and total earnings by 108%. During the same period, average company pre-tax profit was 50.3%, earnings per share 73% and average share price down by -5.4%. The commission said that to realign pay with shareholder interests directors should be paid a basic salary with one additional performance-related element, and only if absolutely necessary. It said remuneration reports should be standardised to enable cross-company comparisons and have clear methodologies on how director pay is calculated. Fund managers, it said, should be required to disclose how they vote on remuneration. It also recommends that shareholder votes on remuneration be forward-looking to apply for the subsequent three years of company performance. Board remuneration committees, it says, should have some form of employee representation and companies should also produce a full pay comparison including total staff costs, the total pay package of executives and tax paid. Companies, it said, should also publish the extent and nature of services provided by remuneration consultants.
Link to High Pay Commission