Shareholder votes alone will not curb executive pay
David Cameron has grabbed the headlines by announcing that his Government is going to take action on executive pay. However, despite denouncing ‘market failure’ in the setting of executive pay, the only clear policy commitments he made were to give shareholders a binding vote on executive pay and more transparency.
Why does this matter? Because if more disclosure and more power for shareholders is all that we are going to get from this Government on executive pay, it simply won’t work.
This formula of transparency and empowering shareholders has been at the basis of public policy on executive pay since the mid-1990s. Shareholders have had an advisory vote on executive pay since 2002. Since then, only eighteen remuneration reports have been defeated at company AGMs, a minute fraction of the total number of votes on remuneration that have taken place.
The problem with the current system is not that the votes are not binding, but that too few shareholders vote against remuneration reports. Making shareholder votes binding will not change this; in fact, some investors have said that they would be less likely to vote against a remuneration report if the vote was binding than they are now. Unless shareholders radically change their stance on executive pay, making their votes binding will do nothing to address the problem of soaring executive pay packages and the growing gap between executive pay and that of ordinary workers.
In the same interview, David Cameron expressed doubts about worker representation on remuneration committees. Yet this, where tried in other countries, has been shown to correlate with lower levels of executive pay and a lower probability of stock option plans. This proposal, long promoted by the TUC, has gained widespread support including from the independent High Pay Commission. Workers would bring a fresh perspective and a common sense approach to discussions on remuneration, in contrast to the current culture that presides on remuneration committees. Shareholders have failed to rein in executive pay, and it is time to try something new.
For those with a preference for evidence-based policy making, looking at the UK’s experience to date, shareholder votes alone have not and will not curb executive pay. Looking at experience in other countries, worker representation on remuneration has been shown to curb executive pay. So…
David Cameron’s comments were made in an interview with Andrew Marr, so there may be more to come on this from the Government when it officially responds to its recent consultation exercise on executive remuneration. We hope.