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| Rising executive pay threatening reputation of big business – report | |
| (35 minutes later) | |
| Executive pay is too high and risks damaging the reputation of big business, according to an influential fund management group which has drawn up ideas for reform that could reduce the overall remuneration package of top bosses. | |
| Hermes Investment Management published a paper showing that the average pay of a chief executive could be cut from £5m to £3m if bonuses were eradicated, or to £4.5m if some of the complexity in current pay schemes was stripped away. | |
| “The phenomenon of rapidly rising rewards for top talent, while not limited to corporate executive pay, is beginning to threaten the public company’s licence to operate and thus potential long-term value,” Hermes said in its report. | “The phenomenon of rapidly rising rewards for top talent, while not limited to corporate executive pay, is beginning to threaten the public company’s licence to operate and thus potential long-term value,” Hermes said in its report. |
| Hermes – owned by the BT pension scheme – has been working on the paper for a number of weeks at a time when the behaviour of big business has shot up the agenda in light of remarks made by Theresa May during her campaign to become Conservative party leader and prime minister. | |
| May hit out against the gap between directors’ pay and the wider workforce, while raising the idea of putting workers on boards. Her ideas are yet to be published formally by the government but the MPs on the business, energy and industrial strategy (BEIS) committee will on Tuesday begin taking evidence on ways to reform corporate governance. | May hit out against the gap between directors’ pay and the wider workforce, while raising the idea of putting workers on boards. Her ideas are yet to be published formally by the government but the MPs on the business, energy and industrial strategy (BEIS) committee will on Tuesday begin taking evidence on ways to reform corporate governance. |
| Outlining ideas for senior executives to hold shares worth five times their salaries – more than double the current norm – Hermes said: “We believe it is necessary to challenge the level of overall pay paid to some executives.” | Outlining ideas for senior executives to hold shares worth five times their salaries – more than double the current norm – Hermes said: “We believe it is necessary to challenge the level of overall pay paid to some executives.” |
| “Public companies, as their name suggests, ultimately need a social licence to operate. Given the responsibility that the chief executive role entails it is appropriate that the individual should be paid commensurately. It is also the case, however, that the role ... is a privileged one and an incumbent is often the receipt of many highly valued non-monetary benefits,” Hermes said. | “Public companies, as their name suggests, ultimately need a social licence to operate. Given the responsibility that the chief executive role entails it is appropriate that the individual should be paid commensurately. It is also the case, however, that the role ... is a privileged one and an incumbent is often the receipt of many highly valued non-monetary benefits,” Hermes said. |
| A number of fund managers have set out ideas to change executive pay after a year of protests at annual general meetings of major companies. The season began in April with two FTSE 100 companies – BP and Smith & Nephew – having their pay deals voted down. Legal & General Investment Management, the fund management arm of the insurer, has told firms there should be a cap on directors’ bonuses, so that they are not bigger than twice the salary. | |
| The current system of pay typically involves directors receiving an annual salary, an annual bonus and a long-term incentive scheme (Ltip) running for three or five years based on shares. Hermes said reducing this complexity could cut pay, while the more radical option of scrapping bonuses altogether – and making awards of shares to directors – could reduce overall pay. | |
| “We strongly believe the time is right for companies and investors to fundamentally rethink their approach to executive remuneration,” Hermes said. | “We strongly believe the time is right for companies and investors to fundamentally rethink their approach to executive remuneration,” Hermes said. |
| The chairman of the remuneration committee should write to employees each year to explain the chief executive’s pay relative to the organisation, Hermes said. | The chairman of the remuneration committee should write to employees each year to explain the chief executive’s pay relative to the organisation, Hermes said. |