Action looms to curb executive pay

There is seldom consensus between Britain’s three party leaders, but David Cameron, Nick Clegg and Ed Miliband all kicked off 2012 with a common theme: spiralling executive pay must be brought under control.

Having spent much of 2011 bashing bankers, politicians of every hue are now tapping into growing public indignation over boardroom rewards. The directors of Britain’s biggest companies have continued to receive hefty pay increases – out of kilter with both the performance of share prices and sentiment in a nation entering a period of deep austerity.

Nick Clegg, the deputy prime minister, has denounced a system of “crony capitalism” in which senior business figures appeared on various company boards, often setting each other’s pay.

“[We have] led the call . . . for restraint and new transparency and accountability on unacceptable excess in executive pay where people are being paid huge amounts of money even though they fail to do well for those companies,” Mr Clegg said on Thursday.

The rhetoric may soon be turned into concrete recommendations when Vince Cable, the business secretary, publishes the results this month of a consultation on executive pay.

Business groups have acknowledged a problem with widening pay ratios and are signalling their willingness to respond.

“We can either be dragged there kicking and screaming or adopt a responsible position,” one business leader said.

“The more business does, the more it helps itself, the more it helps the politicians.”

But many remain nervous of the nature and pace of change.

“Leaders being critical of high pay are not just doing this as a PR exercise,” said another senior lobbyist. “But while there is consensus that the current situation is not tenable, there is no similar consensus around what needs to be done.”

Mr Cable will meet business groups in two weeks to hammer out a more detailed framework.

On the table are recommendations for improving transparency on pay, overhauling the structure of remuneration committees and giving shareholders more clout.

Shareholder and business groups are sanguine on simplifying remuneration and injecting a dose of transparency into fiercely complicated pay schemes.

However, proposals to change the structure of remuneration committees, which politicians have complained are “closed shops” of vested interests, are proving divisive. Policies under consideration include barring executive directors at FTSE 100 companies from chairing remuneration committees at other companies.

Another option is to put an employee representative on the committee – common practice in Germany – to inject a dose of shopfloor reality into decision-making among executive elites.

Mr Cable is said to be drawn to both of those ideas but business groups are yet to be convinced.

“We did say in our response to the consultation that we want to encourage companies to involve employees because that will improve legitimacy and mean employees don’t feel that deals are being done behind closed doors,” said Roger Barker, head of corporate governance at the Institute of Directors.

“But the buck has to stop with company directors and that is why remuneration committees should consist only of company directors,” he said.

Mr Cable is also considering whether to strengthen shareholders’ voting power by giving them the right to vote on remuneration packages or pay policies before they are set in stone.

One large investor group was sceptical about the idea.

“We are aware of the central position we have in the companies we invest in but we are not the agents of social change.”

Deborah Hargreaves, who chairs the High Pay Commission, set up by Compass, the centre-left pressure group, urged the government to bring about change rather than leave it up to shareholders.

She said there was a “huge groundswell of opinion” in favour of tempering the excesses of capitalism. “These are not radicals but ordinary people who want to see fairness in business. The crisis has shown up rottenness at the heart of business, all rewards channelled upwards and people have had enough.”