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Can high executive pay awards be justified?
Accountancy News |
27/01/2012
Executive pay has been back in the news recently, with the government outlining proposals combating the supposed 'fat cat' culture in the City. Business secretary Vince Cable announced plans for additional powers for shareholders, giving them more opportunity to influence pay awards. The reforms are geared at ensuring boards take a long-term, sustainable approach to business growth, rather than building their strategies around the pursuit of short-term profits.
The subject of executive pay continues to be controversial, with some commentators arguing that the government should not intervene in market forces. However, the fallout from the financial crisis has forced the coalition's hand to some degree. The public remain angry about many of the business practices adopted in the City running up to 2008-09, and about the response of the regulators over the last two years. For many, high pay rewards for bankers and boardroom executives feel like salt in the wounds.
Best illustrating this point is the widespread condemnation of former RBS chief Sir Fred Goodwin, who walked away with a bumper pension despite leading the bank to the brink of collapse. He may face a fight to keep hold of his knighthood, but the former banker is sure to have few financial worries in retirement. At the same time, people on low salaries and middle incomes are continuing to suffer the effects of high inflation, pay freezes and rising unemployment. With economic conditions remaining difficult for the masses, public favour for reforms to executive remuneration are understandable.
The Confederation of British Industry is among the business groups to back the government's decision to increase shareholder participation in pay awards. John Cridland, director-general of the lobby group, said executive pay must always be fair and transparent, and where sizeable awards are made, this must be for outstanding, not mediocre, performance. "Millions for mediocrity does a disservice to the reputations of hard working businesses," he commented.
"The CBI strongly supports measures to reduce, withhold, or in exceptional circumstances claw back executive pay as it sends a powerful message to future executives," he commented. "And it is right that remuneration committees should take into account the organisation's broader pay strategy when setting executive pay." He said it is "encouraging" that some of the heat has been taken out of this issue by government coming up with some practical proposals.
Michael Izza, chief executive officer of the Institute of Chartered Accountants in England and Wales, said recently that business leaders need to be more sensitive to the widening pay gap in the UK. He claimed that rapidly rising pay levels and the consequences of the financial crisis suggest that pay isn't always directly linked to performance, and this needs to change. Mr Izza called for a constructive debate on what responsible business actually looks like, to help judge the merits of hefty boardroom salaries. "This will help businesses and government to strengthen their policies on executive pay and other crucial governance issues," he added.
Mr Izza noted suggested that responsible businesses take long-term decisions which ensure the future cash flow-generating ability of the organisation, protecting jobs and growth. They also have a net positive impact, factoring in the impact of their business on the countries and communities they operate in. And such organisations invest in people, he added. "They are responsible employers who seek to preserve jobs, offer training and development, and ensure workers operate in a safe and healthy environment." In his view, the leaders of such companies are those who deserve the high pay awards and associated employment benefits.
With their unique insight into organisations' financial performance, accountants are perhaps well-placed to judge the merits of healthy pay awards for business leaders. In situations where a company has seen revenue and profits soar, while paying attention to corporate social responsibilities, there may be greater justification for sizeable bonuses and generous pay packets. It is important to remember that executives are charged with driving shareholder value, and incentivising directors with pay is the best way for companies to attract and retain the best people. By nature, they are required to take risks to generate growth, and the salaries they earn reflect this 'difficult' role.
If the UK is to mount a sustainable economic recovery, it must be led by the private sector. And this means incentivising business leaders to act in an entrepreneurial way by growing their organisation and creating jobs. Government intervention in pay issues would, in all likelihood, hamper attempts to expand companies and generate growth. Business leaders need to be paid the market rate for their skills and experience, and this is the amount that a rival operator would be willing to pay them to switch allegiances. High executive pay is not really the evil, rather high pay for underwhelming performance.
Posted by Jon Aspinell
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