Theresa May’s executive pay reforms challenged by thinktank

Theresa May has been warned off plans to reform executive pay by leading figures from the world of economics and business, days after she abandoned a proposal to put workers on company boards.

A report by independent thinktank the Big Innovation Centre urged the prime minister to rethink the detail of plans to reform the UK’s corporate governance regime.

The authors – including Bank of England chief economist Andy Haldane and Clare Chapman, remuneration chief of B&Q owner Kingfisher – cast doubt on the wisdom of binding shareholder votes on executive rewards.

They also criticised proposals to force firms to publish their pay ratio, which reflects the earnings difference between shopfloor workers and executives.

Making investors’ votes on executive remuneration legally binding would be a “disproportionate” response that would have “many negative unintended consequences,” the report claimed.

It said shareholders would be less likely to vote against pay deals if they were binding, in case chief executives were destabilised or discouraged from staying in the role.

Instead, they recommend that companies introduce a binding vote only after 25% of shareholders vote against the pay report two years in a row.

On pay ratios, the report said that “although well-intentioned, snapshot pay ratios by themselves have the potential to create misleading comparisons and perverse incentives.”

It pointed out that retailers, which employ a large number of low-paid workers, would appear much more unequal than financial services firms, which do not.

Ratios would also unduly penalise companies that offer non-cash benefits and favour firms that outsource their lowest paid jobs, the report said.

The views run counter to plans unveiled by May to reform boardroom pay culture, as she seeks to show that the Conservative government has workers’ interests at heart.

The prime minister has already dropped one of her key proposals, telling the CBI conference this week that plans to put workers on company boards were no longer on the table.

While the Big Innovation Centre’s report, the first of a series, rejected pay ratios and binding votes, it made a series of recommendations to tackle excess pay.

These include simpler pay structures that require directors to hold more shares, as well as the publication of a fair pay charter outlining the company’s ethos on remuneration.

The report also recommends a change in reporting requirements so the increase in the chief executive’s wealth is directly compared to company performance.

“Executive pay is a matter of profound and legitimate public interest,” said Bank of England chief economist Andy Haldane, who was paid £195,000 by the Bank last year.

“Pay practices can encourage short-term behaviour in ways which harm both firms and the economy over the long-term.

“Moving pay practices in non-financial firms towards those in financial firms can help in tackling those problems.”

Clare Chapman, who earned £82,000 and attended six board meetings last year as Kingfisher’s pay committee chief, said: “All of us involved in UK business are needing to rethink how we achieve growth in the new environment.”

“We support the government’s objectives of rebuilding trust in executive pay, ensuring it is linked to long-term performance, and giving shareholders the right powers.”

As chair of Kingfisher’s panel that sets executive pay, Chapman signed off on chief executive Veronique Laury’s £2m deal last year.

The DIY firm’s chief executive was paid less than a quarter of the £8.6m that predecessor Ian Cheshire earned in 2012, when his package was inflated by a share award.