Controversy has greeted the government’s publication of steps to sharpen up the nation’s corporate governance. Unveiled in the wake of a major review, the package of measures includes a requirement for all listed firms to reveal the pay difference between bosses and workers, and for companies that have at least 20% shareholder opposition to executive remuneration to be named in a public register.
Some have said that the measures don’t go far enough. For example, the Pensions and Lifetime Savings Association (PLSA) was disappointed that its calls for supermajority shareholder approval of CEO salaries went unheeded.
“Requiring a supermajority (75%) rather than a simple majority (50%) means that it would be harder for companies to force through pay proposals despite serious reservations from their most engaged shareholders,” said PLSA stewardship and corporate governance policy lead Luke Hildyard.
Other stakeholders criticised the government for scrapping proposals to make salary approvals legally binding.
However, Pinsent Masons pay expert Graeme Standen said: “Although the abandonment of binding pay approvals has been seen as a climbdown, it would have been difficult to legislate well for these, and also difficult for companies and investors to implement them. Introducing binding annual approvals might even have somewhat discouraged investors from voting against pay packages in the same way as they will at present, for fear of disproportionate disruption and distraction of FTSE boards.”
Are the measures good enough? Or should it be up to organisations, rather than legislation, to correct the executive-pay gap?
The Institute of Leadership & Management's head of research, policy and standards Kate Cooper says: “If organisations have to rely upon the government to force them to have transparent and fair pay policies, then they’re missing something. A key reason why an organisation would have an open and transparent pay policy is to have an impact on the morale of the people who work there, and honour the sentiment that there should be a fair reward for fair effort. If the government has to make leaders do that, then that isn’t addressing employees’ desire for fairness.
“So as an employee engagement exercise, be transparent and open about pay. Be mindful of the ratio between the lowest-paid and the highest-paid. If you’re paying high sums to senior figures, explain why they are justified. Back the explanation up with evidence, so that people understand that the reward is equal to the effort. J Stacy Adams’ equity theory offers an insight here: people are generally satisfied with their levels of pay if they feel that they are being rewarded fairly compared to their colleagues.”
Cooper adds: “If staff can take an informed look at the rewards that senior teams are earning, and have the required factual backup to consider that the sums are fair reflections of the work that those teams are putting in, then there won’t be dissatisfaction. And that’s not something for which governments can legislate.”
For thoughts on connecting the dots between leadership, ethics and corporate culture, check out this learning item from the Institute