The fat cats who scratch each other's backs

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

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.

REX/Eye Candy
A photo of Charles Belk being detained by police on Friday 22 August
Alexis Sanchez celebrates after scoring his first goal for Arsenal in the Champions League qualifier against Besiktas
sportChilean's first goal for the club secures place in draw for Champions League group stages
Arts and Entertainment
Amis: 'The racial situation in the US is as bad as it’s been since the Civil War'
booksAuthor says he might come back across Atlantic after all
ebooksAn evocation of the conflict through the eyes of those who lived through it
Life and Style
Google Doodle celebrates the 200th birthday of Irish writer Sheridan Le Fanu
Arts and Entertainment
Vinyl demand: a factory making the old-style discs
musicManufacturers are struggling to keep up with the resurgence in vinyl
In Eternal Sunshine of the Spotless Mind Jim Carrey and Kate Winslett medically erase each other from their memories
scienceTechnique successfully used to ‘reverse’ bad memories in rodents could be used on trauma victims
Arts and Entertainment
Singer Pixie Lott will take part in Strictly Come Dancing 2014, the BBC has confirmed
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

C# Developer (C#, ASP.NET Developer, SQL, MVC, WPF, Real-Time F

£40000 - £48000 per annum + benefits+bonus+package: Harrington Starr: C# Devel...

C# Swift Payment Developer (C#, ASP.NET, .NET, MVC, Authorize.N

£45000 - £60000 per annum + benefits+bonus+package: Harrington Starr: C# Swift...

DevOps Engineer - Linux, Shell, Bash, Solaris, UNIX, Salt-Stack

Negotiable: Harrington Starr: A fast growing Financial Services organisation b...

Trade Desk FIX Analyst - (FIX, SQL, Equities, Support)

£50000 - £60000 per annum + excellent benefits: Harrington Starr: An award-win...

Day In a Page

Israel-Gaza conflict: No victory for Israel despite weeks of death and devastation

Robert Fisk: No victory for Israel despite weeks of devastation

Palestinians have won: they are still in Gaza, and Hamas is still there
Mary Beard writes character reference for Twitter troll who called her a 'slut'

Unlikely friends: Mary Beard and the troll who called her a ‘filthy old slut’

The Cambridge University classicist even wrote the student a character reference
America’s new apartheid: Prosperous white districts are choosing to break away from black cities and go it alone

America’s new apartheid

Prosperous white districts are choosing to break away from black cities and go it alone
Amazon is buying Twitch for £600m - but why do people want to watch others playing Xbox?

What is the appeal of Twitch?

Amazon is buying the video-game-themed online streaming site for £600m - but why do people want to watch others playing Xbox?
Tip-tapping typewriters, ripe pongs and slides in the office: Bosses are inventing surprising ways of making us work harder

How bosses are making us work harder

As it is revealed that one newspaper office pumps out the sound of typewriters to increase productivity, Gillian Orr explores the other devices designed to motivate staff
Manufacturers are struggling to keep up with the resurgence in vinyl records

Hard pressed: Resurgence in vinyl records

As the resurgence in vinyl records continues, manufacturers and their outdated machinery are struggling to keep up with the demand
Tony Jordan: 'I turned down the chance to research Charles Dickens for a TV series nine times ... then I found a kindred spirit'

A tale of two writers

Offered the chance to research Charles Dickens for a TV series, Tony Jordan turned it down. Nine times. The man behind EastEnders and Life on Mars didn’t feel right for the job. Finally, he gave in - and found an unexpected kindred spirit
Could a later start to the school day be the most useful educational reform of all?

Should pupils get a lie in?

Doctors want a later start to the school day so that pupils can sleep later. Not because teenagers are lazy, explains Simon Usborne - it's all down to their circadian rhythms
Prepare for Jewish jokes – as Jewish comedians get their own festival

Prepare for Jewish jokes...

... as Jewish comedians get their own festival
SJ Watson: 'I still can't quite believe that Before I Go to Sleep started in my head'

A dream come true for SJ Watson

Watson was working part time in the NHS when his debut novel, Before I Go to Sleep, became a bestseller. Now it's a Hollywood movie, too. Here he recalls the whirlwind journey from children’s ward to A-list film set
10 best cycling bags for commuters

10 best cycling bags for commuters

Gear up for next week’s National Cycle to Work day with one of these practical backpacks and messenger bags
Paul Scholes: Three at the back isn’t working yet but given time I’m hopeful Louis van Gaal can rebuild Manchester United

Paul Scholes column

Three at the back isn’t working yet but given time I’m hopeful Louis van Gaal can rebuild Manchester United
Kate Bush, Hammersmith Apollo music review: A preamble, then a coup de théâtre - and suddenly the long wait felt worth it

Kate Bush shows a voice untroubled by time

A preamble, then a coup de théâtre - and suddenly the long wait felt worth it
Robot sheepdog technology could be used to save people from burning buildings

The science of herding is cracked

Mathematical model would allow robots to be programmed to control crowds and save people from burning buildings
Tyrant: Is the world ready for a Middle Eastern 'Dallas'?

This tyrant doesn’t rule

It’s billed as a Middle Eastern ‘Dallas’, so why does Fox’s new drama have a white British star?