Ann Francke: Clear up bloated pay for execs so the many, not the few, benefit

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Theresa May’s pledge to make business “work for the many, not the few” has rightly put soaring corporate pay firmly in the spotlight.

It’s the most potent symbol of the growing divide between the few and the many.  But how do we ensure that such issues aren’t confined to leadership manifestos, but become a central part of the business and political agenda?

The problem won’t fix itself. While workers are seeing the lowest rate of basic pay rises since 2011, chief executive salaries continue to soar. The latest figures from the High Pay Centre show FTSE 100 bosses are paid 183 times the wage of their average worker, an eye-watering 136 times higher than in 1998. 

When better leadership is key to boosting our lagging productivity in the Brexit era, a lack of employee engagement and belief in the fairness of business undermines this. Our research shows four in five employees think their boss sets a poor moral example. 

Pay at the top has become detached from performance. Often there seems to be too little correlation between what top bosses put into a business and what they take out — Sir Philip Green (pictured) and BHS being but one example. 

This is having a knock-on effect on firms being able to attract, develop and retain a diverse, engaged and skilled workforce that has trust in the companies they work for. It’s time leaders realised that people now work as much for a sense of purpose as they do for money and that they should set  the example. 

The next generation of workers — millennials will make up 75% of the workforce by 2025 — are already demanding higher standards of business leaders and will be drawn towards companies with ethical cultures. Transparency driven by new regulations, as well as Glassdoor-type websites, mean employers have far less power to hide the facts and employees’ true feelings about the organisations they work for.

So where do we start? First, set simpler pay and performance metrics. As former BP boss Lord Browne of Madingley said recently: “Executive pay packets have become so confusing no one can figure them out.” 

This is a sensible starting point for businesses, and remuneration committees for all types of business, be they private, public sector or plc. Boards should give a clear indication of how top executives’ pay packets are calculated and measured. They should reflect longer-term purpose and performance, not just short-term financial goals. 

Second, publish clear reports on executive pay and pay ratios.  Transparency drives accountability, which in turn brings pressure for change. That’s why the Securities and Exchange Commission in the US now requires firms to reveal the ratio of CEO pay to employees’. It’s a model the UK should adopt, and one it seems likely the new Prime Minister will support. 

Third, businesses should adopt bonus caps that are limited to a sensible proportion to salary. What that proportion is should be for shareholders or responsible boards to vote on, and their vote on remuneration packages should be binding. 

Enormous bonuses have been heavily documented in the press, with emphasis placed on how disproportionate they often are to base salary and meaningful performance. Our research found 43% of managers rated as “underperforming” took home a bonus in the past year. Binding shareholder votes would quickly bring bonuses more in line with performance. Seems fairly simple, doesn’t it? Yet, we still hear that to attract top talent firms need to offer high executive pay packets. 

But that’s a circular argument. Money is not the only reason why people work; they take satisfaction in the challenge, achieving meaningful goals and having a sense of purpose. Unless something is done to change the status quo then top pay will continue to escalate and business will continue to be viewed as out of sync with society. 

May’s initiative will help to drive much-needed change. But sustainable reform requires a coalition of the willing to be successful: government, business, investors and professional associations should work with those they employ to fix an executive pay system where the costs to the many far outweigh the benefits to the few. 

Ann Francke is chief executive of the Chartered Management Institute

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July 27, 2016 |
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