A culture of excess – the pay of the people who set FTSE directors’ pay
The TUC has published a new report on the pay of FTSE 100 remuneration committees members, who are responsible for setting company directors’ pay. Looking at total earnings from their different board positions, it finds that on average FTSE remuneration committee members are paid £441,383 per year – over 16 times average full-time earnings. The report also reveals that:
- Nearly two thirds (64%) of remuneration committee members hold at least one additional position at another company. Some hold as many as eight additional board positions.
- 33 are remuneration committee members of more than one FTSE 100 company. One sits on the remuneration committee of three FTSE 100 companies.
- Over two thirds of FTSE 100 companies share one member of their remuneration committee with another FTSE 100 remuneration committee.
- Over one third of FTSE 100 companies have executive directors from other companies on their boards.
Those responsible for setting directors’ pay are drawn from a narrow pool, consisting mainly of other board members. They are very highly paid, for what in many cases is not full-time work. Such levels of pay demonstrate that remuneration committees are out of touch with ordinary people and make it harder for committees to understand how executive pay is viewed by either company staff or the general public.
Executive pay has proved a stubborn nut to crack. Companies have been required since 1995 to take into account pay and conditions elsewhere in the company when setting executive pay, or explain why they do not. Most companies have blithely completely ignored this provision over the years, or at best included a one-liner stating blandly that pay and conditions of employees are considered, but providing no evidence that this is actually the case in practice.
In reality, the figures speak for themselves. Recent TUC research shows that FTSE directors have seen their earnings rise by 26% in real terms since 2010, while workers across the rest of the economy have seen an 8.4% real terms cut. This finding simply echoes other research over recent years from organisations such as the High Pay Centre and Incomes Data Services.
There is widespread recognition that the current situation is unacceptable and needs to change. Successive governments have increased reporting requirements and strengthened shareholder rights in relation to directors’ remuneration. The most recent reforms of October 2013 give shareholders a binding vote on remuneration policy and require that remuneration reports include information comparing pay rises for directors with rises for other company staff and state whether they have consulted with employees when setting executive pay.
Unfortunately, these latest reforms, like those before them, have simply not worked. Compliance with the spirit and in some cases the letter of the law is sadly lacking. We are not aware of a single company that has consulted its employees when setting executive pay. Many companies have used only a narrow, generally higher paid, group of employees as their comparator group and, more seriously, have excluded incentive-related remuneration, the largest component of directors’ pay, from the comparison. As for shareholders, they have had an advisory vote on remuneration reports since 2004 and have already shown themselves unable or unwilling to use their influence to tackle executive pay. True to form, just one remuneration report was voted down last year, and for most companies, it was just business as usual.
It is time for a new approach. We need to improve the governance of the executive pay-setting process. Company workers should be represented on remuneration committees. Worker representatives would bring a sense of perspective and common sense into discussions on executive pay and ensure that remuneration committees are able to fulfil their obligation to take account of pay and conditions of other company workers when setting directors’ pay. If remuneration committees are to be equipped to play their part in tackling excessive executive pay, widening their membership to include ordinary company workers is essential.