Efforts to promote greater transparency around pay as a way of curbing soaring boardroom salaries are perhaps beginning to look pointless when one considers that by lunchtime on Thursday, 4 January the average FTSE100 CEO made more money than the typical U.K. full-time worker earns in the entire year.
According to calculations from independent think tank The High Pay Centre and the Chartered Institute of Personnel and Development (CIPD), the professional body for HR practitioners, U.K. top executives passed the median gross annual salary of £28,758 for full-time employees in just three working days.
The United Kingdom’s corporate governance watchdog, the Financial Reporting Council (FRC), has proposed to make further revisions to the U.K. Corporate Governance Code to improve transparency around executive and gender pay. One of its key proposals is to give remuneration committees broader responsibility and discretion for overseeing how remuneration and workforce policies align with strategic objectives.
Separately, the government has already pushed through reforms that will require around 900 listed companies to annually publish and justify the pay ratio between CEOs and their average worker. These reforms also include the introduction of the world’s first public register of listed companies, which catalogues incidences of where more than a fifth of investors have objected to executive annual pay packages.
The Investment Association published the first public register on 19 December 2017. It found that over one in five (22 percent) companies listed on the FTSE All Share Index had at least one resolution that received over 20 percent dissent or was withdrawn, and that pay-related issues topped the list of shareholder concerns. The Investment Association found that almost four out of ten (38 percent) resolutions were due to high votes against pay-related resolutions, such as shareholders voting against companies’ annual remuneration reports, remuneration policy or other remuneration-related resolutions.
Gender risk “could be as big—and as expensive—as the asbestos and payment protection insurance (PPI) claims that have hit the insurance and financial services industry.”
Dr. Michelle Tuveson, Executive Director, Cambridge Centre for Risk Studies, University of Cambridge
Those companies named for having the biggest votes against their remuneration policies include Safestore Holdings, the U.K.’s largest self storage company, which saw nearly half (49 percent) of shareholders vote against, and Entertainment One, a film and music distribution company which saw a 47 percent vote against. Media and publishing company Pearson experienced the biggest shareholder revolt over its remuneration report that included a 20 per cent pay rise for its CEO, with two-thirds of investors (65.6 percent) rejecting it.
But executive pay is just one of the areas under scrutiny: discrepancies in pay between men and women are also coming under the microscope, and compliance functions should be aware of the legal—as well as reputational—ramifications of their organisations’ failing to follow the letter, as well as the spirit, of the law.
New rules that come into effect this year mean that organisations with 250 or more workers must publish figures showing gender pay discrepancies in pay and bonuses by April. The results will be published on a government database, and will be available for three years. Employers of about half of the UK's workforce will be affected. As of 23 January, however, just 651 firms have published their figures.
One hopes—but does not realistically expect—an improvement on last year’s statistics. In 2016, the U.K. gender pay gap was 9.4 percent for full-time workers, or 18.1% for all staff. And in organisations or industries where men occupy the more senior roles (which, admittedly, is most of them), or which have a predominantly male workforce, the pay discrepancy can be very wide. For example, women’s hourly pay rates are 52 percent lower than men’s at budget airline Easyjet because only 6 percent of its U.K. pilots are women—a role which pays £92,400 (U.S.$129,231) a year on average—whereas 69 percent of lower-paid cabin crew are women, with an average annual salary of £24,800 (U.S.$34,685).
Renewed focus on executive bonus structures
Last week’s collapse of construction company Carillion, a major supplier of public infrastructure projects, has also shone a light on executive pay structures, and has raised questions as to why HR functions, in-house legal teams, remuneration committees, and investors can sign off on bonus schemes that are so at odds with best practice.
In 2016, as the company’s financial position became increasingly precarious, with rising debts, decreased cash flow and a ballooning pension deficit, the Carillion board controversially changed the rules regarding bonus clawback/malus provisions.
“Clawback” involves requiring an individual to repay amounts they have received, while “malus” applies to variable pay that has been “earned” but not yet paid out, and enables a company to reduce or cancel it.
Under the 2015 remuneration policy, the firm could claw back payment in the event of business failure: a year later, however, the policy listed only the mis-statement of financial results or gross misconduct as triggers for bonus clawback. And as luck would have it, the likelihood of either of these being triggered as a direct result of Carillion’s collapse have now become more remote, though the U.K.’s Official Receiver is set to examine the conduct of current and past directors.
Even usually pro-business groups have criticised Carillion’s remuneration policy change. The Institute of Directors has said that “the relaxation of clawback conditions for executive bonuses in 2016 appears in retrospect to be highly inappropriate”.
The U.K. Corporate Governance Code—which is undergoing review—has included clawback and malus on variable pay since 2014. However, the Code does not specify minimum circumstances in which clawback and malus should apply, and the draft Code published as part of the FRC’s consultation has retained this position. Instead, companies have discretion to decide which events should—and should not—trigger such clauses, which means that “rewards for failure” could still occur.
Several companies have pledged to turn this situation around by 2020, but the reality looks a long way off for the majority of employers. For example, the BBC has been fighting criticism of its pay practices after its China news editor Carrie Gracie resigned earlier this month in protest against unequal remuneration and “unlawful” pay discrimination. Last July, the broadcaster published the salaries of its top presenters who received salaries of more than £150,000 (BBC middle-managers on similar salaries were saved such ignominy). When faced with the evidence, Gracie lodged an equal pay complaint in August.
Gracie’s pay was £135,000 (U.S.$188,810) in 2017, but other (male) editors in similar roles were being paid markedly more. Jeremy Bowen, the BBC Middle East editor, earns somewhere between £150,000-199,000 (U.S.$209,790-$278,321), while North American editor Jon Sopel earns somewhere £200,000-249,000 (U.S.$279,720-$348,251). The BBC had offered a 33 percent pay rise but, according to Gracie, it had failed to offer equal pay.
Given how media-savvy the broadcaster ought to be, Gracie’s resignation soon descended into farce, with the organisation seemingly doing its utmost to ensure compliance with a bad policy. As co-presenter on the Today Programme, the BBC’s flagship news slot on Radio 4, Gracie was barred from commenting or being interviewed directly by any BBC journalist on her own news story, which was one of the day’s main headlines. Instead, to abide by the BBC’s rules on impartiality, she had to be interviewed by a freelance journalist as other BBC journalists were prevented from doing so. Fellow female presenters and broadcasters were also taken off air when they shared or voiced their support on social media.
The situation has also not been helped by the fact that two of Gracie’s higher-paid, male colleagues joked about her complaint in “off-air” remarks while preparing for an interview on the story itself.
The case has led to speculation that the BBC could face a number of potentially expensive legal claims regarding equal pay from its broadcast talent, and perhaps throughout the corporation generally. And the BBC is unlikely to be the only organisation that may be subject to legal claims for historic gender discrimination in its working and recruitment practices.
Dr. Michelle Tuveson, executive director of the Cambridge Centre for Risk Studies at the University of Cambridge Judge Business School, believes that gender discrimination has the potential to see companies face years of legal claims because of potential liabilities that they could face under directors and officers (D&O) and errors and omissions (E&O) insurance policies for discriminatory working/hiring practices over the past four decades.
According to Dr. Tuveson, gender risk “could be as big—and as expensive—as the asbestos and payment protection insurance (PPI) claims that have hit the insurance and financial services industry.”