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.

Start your day with The Independent, sign up for daily news emails
Property
house + home
Arts and Entertainment
tvGame of Thrones season 5 ep 4, review - WARNING: contains major spoiliers!
Life and Style
Bats detect and react to wind speed and direction through sensors on their wings
tech
Arts and Entertainment
The Ridiculous Six has been produced by Adam Sandler, who also stars in it
filmNew controversy after nine Native American actors walked off set
Sport
Danny Jones was in the Wales squad for the 2013 World Cup
rugby leagueKeighley Cougars half-back was taken off after just four minutes
Life and Style
The original ZX Spectrum was simple to plug into your TV and get playing on
techThirty years on, the ZX Spectrum is back, after a fashion
News
Tiger Woods and Lindsey Vonn are breaking up after nearly three years together
peopleFormer couple announce separation in posts on their websites
Sport
football
Life and Style
Google celebrates Bartolomeo Cristofori's 360th birthday
techGoogle Doodle to the rescue
Arts and Entertainment
Haunted looks: Matthew Macfadyen and Timothy Spall star in ‘The Enfield Haunting’
tvThe Enfield Haunting, TV review
ebooks
ebooksA celebration of British elections
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

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

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Claims Administrator

£16000 - £18500 per annum: Recruitment Genius: This is an excellent opportunit...

Recruitment Genius: Senior SEO Executive

£24000 - £28000 per annum: Recruitment Genius: A Senior SEO Executive is requi...

Recruitment Genius: Online Customer Service Administrator

£16000 - £18000 per annum: Recruitment Genius: An Online customer Service Admi...

Recruitment Genius: Digital Marketing Executive

£18000 - £22000 per annum: Recruitment Genius: This global, industry leading, ...

Day In a Page

Fishing for votes with Nigel Farage: The Ukip leader shows how he can work an audience as he casts his line to the disaffected of Grimsby

Fishing is on Nigel Farage's mind

Ukip leader casts a line to the disaffected
Who is bombing whom in the Middle East? It's amazing they don't all hit each other

Who is bombing whom in the Middle East?

Robert Fisk untangles the countries and factions
China's influence on fashion: At the top of the game both creatively and commercially

China's influence on fashion

At the top of the game both creatively and commercially
Lord O’Donnell: Former cabinet secretary on the election and life away from the levers of power

The man known as GOD has a reputation for getting the job done

Lord O'Donnell's three principles of rule
Rainbow shades: It's all bright on the night

Rainbow shades

It's all bright on the night
'It was first time I had ever tasted chocolate. I kept a piece, and when Amsterdam was liberated, I gave it to the first Allied soldier I saw'

Bread from heaven

Dutch survivors thank RAF for World War II drop that saved millions
Britain will be 'run for the wealthy and powerful' if Tories retain power - Labour

How 'the Axe' helped Labour

UK will be 'run for the wealthy and powerful' if Tories retain power
Rare and exclusive video shows the horrific price paid by activists for challenging the rule of jihadist extremists in Syria

The price to be paid for challenging the rule of extremists

A revolution now 'consuming its own children'
Welcome to the world of Megagames

Welcome to the world of Megagames

300 players take part in Watch the Skies! board game in London
'Nymphomaniac' actress reveals what it was really like to star in one of the most explicit films ever

Charlotte Gainsbourg on 'Nymphomaniac'

Starring in one of the most explicit films ever
Robert Fisk in Abu Dhabi: The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers

Robert Fisk in Abu Dhabi

The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers
Vince Cable interview: Charging fees for employment tribunals was 'a very bad move'

Vince Cable exclusive interview

Charging fees for employment tribunals was 'a very bad move'
Iwan Rheon interview: Game of Thrones star returns to his Welsh roots to record debut album

Iwan Rheon is returning to his Welsh roots

Rheon is best known for his role as the Bastard of Bolton. It's gruelling playing a sadistic torturer, he tells Craig McLean, but it hasn't stopped him recording an album of Welsh psychedelia
Russell Brand's interview with Ed Miliband has got everyone talking about The Trews

Everyone is talking about The Trews

Russell Brand's 'true news' videos attract millions of viewers. But today's 'Milibrand' interview introduced his resolutely amateurish style to a whole new crowd
Morne Hardenberg interview: Cameraman for BBC's upcoming show Shark on filming the ocean's most dangerous predator

It's time for my close-up

Meet the man who films great whites for a living