The City of London Corporation’s policy chairman shares his views on the executive pay debate
Over the last 18 months – since the creation of the Vickers Commission – there has been considerable debate across the UK about the need for structural reforms in the banking sector.
And as bonus season approaches, the debate over excessive executive pay remains ever alight.
But it is important to note that these two issues are distinct. Executive pay and other incentives are not structures limited to the City, nor indeed to the banking sector.
The issue of executive pay is one that concerns all parts of the economy, and all parts of the country. The anger that such payouts provoke amongst the public has naturally resulted in political will to legislate on the matter.
However, I remain firm in the conviction that the owners of businesses should be wholly responsible for taking decisions about pay awards to managers and the staff they employ.
Businesses function in different ways, and it is important that pay legislation accounts for this. There is simply no one-size-fits all formula to address such diversity. Whether a business is large or small, its payment and reward model must be tailored to its objectives.
High pay for success is perfectly acceptable. The issue we must confront at present is the fact that some individuals have been rewarded with high pay for failure, and this needs to be addressed.
For example, sales-based businesses need bonuses to encourage a particular work ethic, and it is for this reason that even in the most junior sales roles we see good work rewarded through ‘On Target Earnings’ (OTE).
In the case of larger firms who have to vie for a position in the global marketplace, the challenges and objectives are vastly different.
On a global scale, where the work force is increasingly mobile, and head-hunters seek to poach the most adept individuals, it is crucial that businesses are able to offer the appropriate incentives in order to retain and attract talented staff. This is healthy practice and encourages growth and competition, reaping benefits for the wider economy.
High pay for success is perfectly acceptable. The issue we must confront at present is the fact that some individuals have been rewarded with high pay for failure, and this needs to be addressed.
Companies that have allowed such practices to take place need to be held to account by their owners – ultimately shareholders.
The government has recognised this, with Vince Cable outlining plans earlier this week to give new powers to shareholders of all companies that would enable them to veto “excessive” boardroom pay at Britain’s top businesses and “claw back” bonuses that later prove unwarranted.
Of course, shareholders already have considerable powers in this area but we need to encourage them to engage in the scrutiny of this process more actively.
Other proposals designed to increase transparency and diversity in the boardroom are also to be welcomed but as ever the devil will be in the detail of how they are implemented.
When it comes to pay, shareholders are absolutely the right people to act as a check on the management processes that determine executive pay. With such measures being put in place to empower shareholders, will executive pay drop from the political agenda?
Stuart Fraser is policy chairman at the City of London Corporation. Read Sophie Hobson’s interview with Stuart Fraser.
Leave a Comment