Reeves argued that such income imbalances in society were not just “morally wrong”, but ultimately not helpful in creating a sustainable and well-functioning economy, pointing out the work the Government needs to do in the UK to compensate for having one of the most unequal pay distributions in an OECD country.
She wondered why there was not more focus on discussing incentive schemes for all levels of the workforce – the people who actually keep a company going and expressed disappointment that tracker funds, which have to hold all the stocks in a particular index, couldn’t do more to hold executive remuneration to account.
Diandra Soobiah, Head of Responsible Investment at NEST, the largest UK workplace pension scheme set up the by Government to increase pension scheme take up, asked why executives should be randomly rewarded for external events.
“Variable pay tends to be linked to a number of metrics that are tied to the market and we have seen strong bull runs over the years from investment markets and as a result CEOs have been handsomely rewarded. But unfortunately, we don’t think workers at those companies and society at large were rewarded. Company success is not just generated by the CEO but by all the people in the company, so at NEST, we take a wider lens to the conversation,” Soobiah said.
She defended the value CEOs bring to the largest companies whose choices would have repercussions for decades to come but she suggested that in the 1970s, the decisions top executives would have been making would have been as significant for a fraction of the reward.
“Should executive pay be reined in?” she asked. I think it should definitely be made fairer. It should be better structured. And it should incentivise the right kinds of behaviours.”
The design of pay
The Purposeful Company is a research-based think tank set up to encourage British business to serve all stakeholders, not just shareholders, for broad-based economic growth. In one report, published in October 2019, it highlighted that deferred shares or restricted stock units are a valid alternative to LTIPs and support long-term value creation.
But just 5% of the UK’s largest companies had so far adopted this incentive approach, despite consensus from the companies surveyed (in the FTSE 350) that it could be appropriate for up to a quarter of the businesses surveyed.
Tom Gosling, Partner at PwC, Executive Fellow at London Business School and on the Steering Group of The Purposeful Company, said: “I do believe that a model based on restricted stock would be a better model for many companies than the one we have at the moment.” And he argued that change was “too slow”.
But executives from some of the world’s fund management firms, BMO Global Asset Management and Schroders, issued caution over the “unintended consequences” of new models before they become too widespread.
“One size doesn’t fit all,” warned Kalina Lazarova, Director, Responsible Investment, BMO Global Asset Management.
Jessica Ground, Global Head of Stewardship at Schroders, believes it is important for executives to have “skin in the game” for long-term value creation and generally is supportive of the deferred shares model. But she agreed with Lazarova that care had to be taken in how and in which companies and sectors this new model is introduced.
Ground also argued that it is necessary to take a broader view on the whole compensation picture. She said: “I think it could be worth going back to the drawing board and working out what LTIPs were originally designed to do. You know – you’ve got your cake: that’s your pay. You’ve got your icing: that’s your bonus and the LTIPs were designed to be the cherry on the top. Somewhere along the line schemes started to be designed so that the LTIP always pays out and that’s what really has to change.”
Not paid enough?
Professor Jenter approached the argument from another perspective. While both acknowledged the “very serious” challenges of growing social and income inequality, they argued that attacking CEO pay was akin to flogging the wrong horse for wage stagnation, worker pension insecurity and growing social inequality.
He argued: “If we were to rein in CEO compensation through regulation or other means, we would end up making the biggest shareholders richer, not the employees. So, the notion that you sometimes hear in the press that if somehow the CEO was paid less, there would be more money left over for employees. It’s just not the case.”
He also argued that given the size of listed companies these days, CEO pay is actually relatively small. “How can anyone claim that no one can be worth $10 million? If the company they are running is worth $10 billion, 1% is $100 million.