David Prosser: Ducking the really tough call on tackling executives' runaway remuneration

Outlook: Are we tackling the absolute levels of senior executives' pay, or the way in which that pay is decided?

There is no doubt that today's report from the High Pay Commission will strike a chord with many people – and not just the increasing numbers of protesters supporting such campaigns as Occupy London. The decoupling of executive pay from the remuneration of the rest of the workforce began well before the credit crunch, but in an age of austerity, widening inequality is all the more divisive.

Still, these issues are deceptively simple. The first challenge for the High Pay Commission and other campaigners is to decide what really worries them. Is it the absolute level of the rewards paid to senior executives, or the way in which those rewards are decided?

In the case of the High Pay Commission, it appears to be mostly the latter. Most of the reforms it suggests (though not all) would require companies to think much harder about how the pay of their management is decided upon. That is not the same thing at all as making a bald assertion that there is such a thing as a salary that is too high.

In that sense, today's report will disappoint many people – those who believe it is simply wrong for, say, Barclays' Bob Diamond, pictured, to earn £4.3m, 169 times more than the average British worker. But pay reform requires realism: even if, as the High Pay Commission points out, the ratio between the pay of the boss of Lloyds Bank and his average employee has risen from 14 to 75 over the past 30 years, it seems highly unlikely this Government – or any future one – would place a legal cap on such a measure, let alone set maximum salary levels.

Persuading the Government to force companies to do more to properly align the interests of managements and shareholders is a more hopeful prospect, however. The question is: how best to do that?

The High Pay Commission's suggestions fall into two categories: reforms that would force companies to be more open about what they pay executives, including how that compares to what the rest of the workforce gets, and widening the body of people responsible for setting pay.

Both sets of reforms have merit. Still, it is worth noting that the pay structures in place at many companies today reflect previous attempts to hold executives to account (rather than, in most cases, to obfuscate, as the High Pay Commission rather uncharitably suggests). Executive pay is now set with reference to hugely complicated performance yardsticks because remuneration committees have sought to show they are sensitive to complaints about rewards for failure. So sensitive, in fact, that it is almost impossible to understand the pay formulas they put in place.

Would adding employee members to the remuneration committee, as the High Pay Commission suggests, deal with that problem? It might, but such representatives might equally fall into the same trap. Just as they may also find it difficult to counter the traditional argument for escalating executive remuneration – British companies must compete for the best talent in a global market for top managers – even with greater disclosure of pay ratios.

In any case, there is an argument for a certain amount of complexity in executive pay. For instance, extending the claw-back regime that applies at banks, where rewards can be taken back in the event that a company's performance does not endure, would complicate remuneration but be worthwhile.

What we should strive for is a governance system that empowers remuneration committees – no matter who sits upon them – to exercise the judgement for which they were appointed. Rather than hiding behind a pay formula, complicated or otherwise, these committees should decide for themselves what to pay management – and defend their decision whether it is unpopular with executives or the wider workforce.

These aspirations are difficult, however, which is one reason why executive pay has continued to spiral despite well-intentioned attempts to tackle the problem. In the end, capping pay, or pay ratios, might be impossible politically, but it would be a much more direct way to tackle the problems identified by the High Pay Commission.

 

State aid approval could easily get stuck in the post

Moya Greene, the new chief executive of Royal Mail, says she was taken aback by the regulatory strictures the organisation had been operating under prior to her arrival from a similar job in charge of Canada Post. But if she thinks Royal Mail has had it tough from British regulators – Ms Greene says the environment is much improved – she's not going to enjoy dealing with Brussels.

The European Commission is, of course, investigating whether the Government's plan to relieve Royal Mail of its pension fund deficit and write off much of its debt constitutes illegal state aid. Until the verdict is announced, it is impossible to see how ministers might proceed with the organisation's privatisation.

Ms Greene seems confident the Commission will be supportive. And no doubt, despite the objections of Royal Mail's competitors, European regulators will find a way to let the deal proceed. The problem is the way it might well involve a forced sell-off of certain Royal Mail assets – like its General Logistics Systems unit, for instance, where strong performance has been hauling the rest of the organisation into the black.

The good news for Royal Mail, aside from yesterday's better interims, is that industrial relations have improved under Ms Greene's management, despite the disappearance of another 5,000 jobs over the past 12 months. That looks likely to be tested though – the slowdown in Royal Mail's letters business, where so many staff are employed, has been more marked than expected. And though other parts of the business are offering improvements to compensate, they are less labour intensive.

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