The fat cats who scratch each other's backs

James Moore examines flaws in the executive remuneration system and suggests some remedies

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The Independent Online

Are remuneration committees just a way for Britain's executives to slap each other on the back and rubber-stamp huge pay rises each year? It's beginning to look that way. According to Britain's Combined Code on Corporate Governance, a remuneration committee – RemCo, in City speak – is supposed to avoid "paying more than is necessary" to "attract, retain and motivate directors of the quality required to run the company".

At least three directors should be appointed, and they should be classed as independent of the company's executives, and independent of any other interested parties, such as big shareholders. The Code states that, once in place, they should have "delegated responsibility for setting remuneration for all executive directors".

It sounds great in principle. But it is increasingly being exposed as a sham. The latest controversy was sparked by testimony to the Parliamentary Commission on Banking Standards by Alison Carnwath, pictured, the former chairman of Barclays' RemCo. She told members of the Commission that she believed former chief executive Bob Diamond should receive nothing in 2011, a year in which Barclays performance was described by Mr Diamond as "unacceptable" and in which the bank missed his own targets for profitability. But the company's chairman Marcus Agius decided that Mr Diamond should be paid. The chairman carried the day, and she carried the can – at least until now.

It's not only Barclays. Almost all the votes against company boards during the Shareholder Spring were related to pay. No wonder. Last year, a report by Income Data Services found that pay and benefits of top executives rose by 27 per cent to average £4m each at a time when workers saw small, or no, increases in wages.

Is there any point to these committees? That's open to question. A report by the High Pay Commission in 2012 found that a third of FTSE 100 companies had a lead executive from another company on their RemCos, and out of 366 members in total, 41 were classed as lead executives.

An executive who benefits from a bad system is hardly going to rock the boat when he serves as an independent non-executive director on another board.

The TUC is in the midst of a similar research project looking in detail at the composition of RemCos. It would be a big surprise to see much has changed since the Commission finished its work. Campaigners for better corporate governance are hardly surprised. They argue that such controversies occur so frequently because of the very similar backgrounds of those in charge of bosses' pay.

Pirc, which advises many of Britain's pension funds on how to vote at company AGMs, says things have to change. A spokesman adds: "The remuneration committees of our largest public companies are comprised of people whose own earnings are stratospheric compared to the rest of the working population. As such, it's hardly surprising that they regularly misjudge the way their decisions will be seen, and seem oblivious to the tough environment their own workforce faces.

"We've concluded that the best way to address this is by breaking open the closed shop of remuneration committees and by extending membership of them to those from a wider range of backgrounds, including employees."

TUC General Secretary Frances O'Grady says: "The meteoric rise in directors' pay over the last decade bears no resemblance to company performance or the far lower pay rises that ordinary staff have received.

"As the setters of directors' pay packages, remuneration committees must shoulder the blame for this. Committees are often packed with directors from other companies, so it is hardly surprising that they always agree to raise the bar ever higher on top pay awards. For remuneration committees to remain relevant, they need radical reform. That's why the TUC has long advocated putting representatives of ordinary staff on committees to provide a much needed dose of reality, as well as openly advertising non-executive director positions." But any move to change will face opposition from the business lobby. The CBI, in its response to a consultation on remuneration committees by Vince Cable's Business Department, says: "We absolutely do not accept the myth of a 'cosy club' of business leaders setting pay for each other. The evidence shows that no two FTSE 100 executive directors sit on each other's remuneration committees. The challenge of how to improve transparency is best tackled through the UK's corporate governance framework".

Suggestions of employees being represented on remuneration committees have led the chairmen of big companies to threaten to quit Britain. A recent report by PricewaterhouseCoopers has suggested there may be a freeze on pay this year. But no one expects it to last once the fuss has died down.

Which means more controversy and more incidents like the strike at the Hull operation of convenience-food maker Greencore. Staff are fighting to restore cuts to wages, which they had temporarily agreed to help the business. A tribunal has said they should get the money but Unite says the firm simply issued new employment contracts to get around this. Last year, chief executive Patrick Coveney took home a £1.3m package, not including long-term awards and share options.