Theresa May's executive pay reforms sparks opposition

Various companies, academics and consultants have rejected Prime Minister Theresa May’s proposals for executive pay and corporate governance reform in a report by the Big Innovation Centre (BIC).

The prime minister set out her aim of shaking up Britain’s boardrooms, when she came to power in July, as part of a broader attempt to rebrand the Conservative party as being for low-income voters who are “just about managing”.

The two proposals rejected in the report were the annual binding votes on executive pay and publishing of pay ratios between chief executives and workers.

Contributors to the report included Bank of England’s Chief economist Andy Haldane, GlaxoSmithKline’s chief executive Andrew Witty, Kingfisher non-executive director Clare Chapman and Prof Alex Edmans, a corporate governance expert at London Business School.

“Executive pay is a matter of profound and legitimate public interest. Pay practices can encourage short-term behaviour in ways which harm both firms and the economy over the long term,” said Haldane.

“Radically rethinking how pay can support long-term behaviour is now the imperative and this report can be a huge accelerator for boards wanting to adapt quickly,” said Chapman.

The think-tank agreed that action on pay is certainly needed to change executive short-termist behaviour and “to rebuild trust” but did not believe her two methods were appropriate.

The report highlighted how the measures would damage efforts to motivate and retain chief executives. With regards to pay ratios the think-thank felt the ratios would create misleading comparisons and perverse incentives.

"Pay ratios do not lend themselves to valid comparisons between companies, even within the same industry" and "may lead to pay being decoupled from performance," said the report.

As for annual binding votes the report argues that it would be a "disproportionate response... and would be likely to have many negative unintended consequences".

As it stands executive pay is voted on every three years. The report says that if a company’s policy receives less than 75% support from shareholders in two consecutive years then that vote should be binding.

May has already dropped one of her main proposals at the annual CBI conference earlier this week, putting an end to her plan of having workers on company boards.

The prominent figures contributing to the report recommendations will make it a powerful contribution to the debate on corporate governance reforms.

The recommendations include measure for “simpler pay structures”. The report calls for the use of more of share awards stretching over 5-7 years instead of traditional performance-related pay and cash bonuses.

Another suggestion was to have more transparency over remuneration packages with more consultation with employees.