‘A wasted opportunity’ – asset managers slam Government’s pay ratio rules

Asset managers have slammed Government plans to force companies to reveal the pay ratios between CEOs and employees, which will see the firms facing significant shareholder opposition listed on a an executive pay register overseen by the Investment Association.

Proposed by Business Secretary Greg Clark, the new corporate governance laws will take effect by June 2018.

However, Neville White, head of SRI policy and research at EdenTree Investment Management, deemed the proposals “a wasted opportunity” while Royal London Asset Management’s head of sustainable investments Mike Fox says the figures “could easily be manipulated”.

White says: “The lack of any serious corporate governance reform proposals in the announcement today presents another wasted opportunity to engage seriously with the social divisions caused by runaway executive pay.”

“The Government’s much watered down proposals fail to provide any meaningful tools for investors to persuade behavioural reform around pay and will provide no enduring mechanism for change. In our consultation response to the Government we argued strongly for a mandatory annual shareholder vote on pay policy as a minimum forward-looking standard. It is, therefore, acutely disappointing to see even this modest proposal disappear from the final recommendations.”

However while White calls for harder-hitting change, Fox questions the value of altering the status quo.

Fox says: “We welcome the attention that the Government has given to corporate governance issues and executive pay, however any new measures that are introduced need to add value to what is already in place.

“The current system does seems to be working: shareholders have become more proactive, the vast majority of companies have responded appropriately and this is the key reason why chief executive pay has fallen by almost 20 per cent this year…We don’t think that forcing listed companies to reveal the pay ratio between bosses and workers will be meaningful. It will show large discrepancies between sectors depending on the nature of the workforce and the results could easily be manipulated.”

Hermes Louise Dudley, portfolio manager in the global equities team, warns pay transparency should not be “too prescriptive” and that long-term remuneration should not be underestimated.

“Transparency on pay and holding companies to account around their remuneration and incentive structures are central corporate governance themes that can contribute positively to long term business success,” Dudley says.

“That said it is important to not be too prescriptive. Often we see that companies with effective pay packages employ the use of numerous metrics: ‘a balanced scorecard’ approach. One feature we encourage is making greater use of long-term metrics and ensuring the short-term versus long-term incentives are split in the interests of long-term shareholders to promote alignment of interests. Employees are key stakeholders in the long-term success of businesses and therefore it is important for companies to be clear in their communication and objectives including the distribution of profits.

However, Simon Richardson, senior lecturer in human resource management at Westminster Business School, says shareholders should be handed even more control.

“The government’s final confirmation of the measures taken to curb excessive executive pay resemble a voluntary code of practice rather than a set of clear legal steps which provide shareholders with the power to block what they perceive to be inappropriate pay packages,” Richardson says.

“While the reduction in average CEO pay is a welcome development, the fact is that CEO pay has more than quadrupled in the past 20 years, while average UK worker pay has only increased by 50 per cent over the same period. As such, many would see this executive pay trend needing to be kept under control for some time to come. The pay transparency requirements in the new legislation will provide a welcome window into the CEO pay debate, but the shareholders still need more control in the process.”