05 April 2017

Workers' representatives should have a seat on remuneration boards, the Business, Energy and Industrial Strategy (BEIS) Committee has said.

The cross-party group of MPs said executive pay has become disconnected from performance and is getting out of hand, urging the government to put in place tougher rules on the salaries of CEOs.

Indeed, recent research from the Equality Trust found that FTSE 100 bosses are taking home 386 times The National Living Wage, with an average income of £5.3m a year.

The BEIS Committee recommended that workers' representatives should have a seat on remuneration committees and encouraged the appointment of workers to company boards – however, on this latter point the Committee did not go so far as to suggest their appointment be made compulsory.

For stronger engagement with the community and staff, the Committee called on firms to consider stakeholder advisory panels, through which a dialogue can be kept open with consumer, suppliers and workers.

Iain Wright, Chair of the BEIS group, said: "Executive pay has been ratcheted up so high that it is impossible to see a credible link between remuneration and performance. Pay must be reformed and simplified to incentivise decision-making for the long term success of the business and to pursue wider company objectives than share value."

"The rise of 'ownerless companies', where no single investor has a sufficiently large stake in the business to act as a responsible owner, checking performance and behaviour, provides a significant challenge to sound corporate governance. Successful, productive and profitable companies cannot be disconnected from society. Businesses have wider responsibilities than short-term profits; they have a responsibility to their employees, their suppliers, and to the communities in which they operate," he added.

Among the recommendations were also proposals for companies to publish the pay ratio between CEO, senior executives and all UK employees; and that a target should be set for more diversity on boards, including at least half of board members being women by 2020.

"Too often in the wake of corporate failures we discover that directors, especially non-executives, have failed to provide sufficient challenge. Too often these individuals seem to be drawn from the same cosy club," Iain Wright explained.

"We need greater diversity in our boardrooms, better training for directors, and more measures to enhance the executive pipeline, ensuring that talented people within an organisation are encouraged and supported at an early stage of their careers, and beyond, into middle and senior management," he added.

The report also recommended that the Financial Reporting Council (FRC) should revise its Code to include a requirement for a binding vote on executive pay one year after any previous pay package has been rejected by at least 25% of shareholders. In addition, the Chair of remuneration committees should resign if their proposals are not backed by at least three-quarters of shareholders.

It also suggested the FRC should have stronger powers to hold company directors to account for their failings, including reporting them publicly to shareholders, and giving them a 'traffic light' rating on the quality of their corporate governance.

The Institute of Employment Rights also calls for workers to have a seat on company boards in our Manifesto for Labour Law – 25 recommendations for the reform of employment law, the principles of which have been adopted by the Labour Party.

However, we do not think this action alone is enough to reduce the UK's ever-widening pay gap, and further recommend that collective bargaining is promoted at both sectoral and enterprise levels, applying upward pressure on the wages and conditions that the average worker receives.

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