Greater transparency and fairer decisions are required, says response to government green paper, as well as consideration of human capital

The value of organisations’ human capital should be a key consideration when it comes to making decisions on executive pay, the CIPD has said – and warned that if the regime around executive pay is not rethought, CEOs could eventually earn 400 times the average UK wage.

In a joint response, with the High Pay Centre, to the government’s green paper on corporate governance, the CIPD said a major rethink on the issue was needed to increase transparency around CEO pay. Consideration by boards of their broader responsibility to the workforce was also seen as vital.

Peter Cheese, chief executive of the CIPD, said it was hard to justify extremely high reward for executives if it was unconnected to the organisation’s culture and the rewards, contribution and performance of the wider workforce. A fundamental rethink was needed around how businesses create value for the long term, while recognising the contribution of all employees, not just the few at the top, he added.

“Fiddling around at the edges of the current systems won’t provide the solutions we need for an innovative, productive and leading economy,” said Cheese, who welcomed the Financial Reporting Council’s plans to review the UK Corporate Governance Code. “Let’s create a new system where decisions about executive pay are taken within a different context, one that places the firm’s human capital development – or workforce – at the heart of board decision making.”

The two organisations warned that if FTSE 100 CEO remuneration continued to increase at the same rate it had over the last two decades, the average ratio between CEO pay and average salaries could increase from the present 129:1 to 400:1 within 20 years.

Recommendations from the CIPD and High Pay Centre include the requirement for all publicly listed companies to publish the ratio between the pay of their CEO and median pay in the organisation; that at least one employee representative should be present on remuneration committees; and that a standalone human capital sub-committee should be established, chaired by the HR director.

They also called for the government to set voluntary human capital reporting standards, to provide better information on how organisations invest in, lead and manage their workforces.

Stefan Stern, director of the High Pay Centre, said voluntary measures and modest reforms had been attempted but had not proved effective: “Twenty-five years after Sir Adrian Cadbury first reported on reforms to corporate governance, it is surely time to take the bolder action that is needed. A healthier regime on top pay could have many positive consequences for UK businesses and for society generally. This could be the boost that 'Brexit Britain' needs."

Charles Cotton, performance and reward adviser at the CIPD, added: “We are concerned there is an over-focus on pay at the top, and on financial performance measures to the detriment of the rest of the workforce.”

Research by the CIPD in 2015 revealed that disproportionate levels of CEO pay were a major issue for employees, with 59 per cent citing them as a reason they were demotivated at work.

With the financial reporting season approaching, executive pay is returning to the headlines, with a growing sense that investors are willing to actively vote against packages they consider inappropriate.

“Many investors are now realising that it’s becoming an issue, and that they need to be seen to be more active in questioning large packages, and asking ‘how is it helping the organisation?’ in terms of both financial and non-financial measures,” said Cotton.

According to the Financial Times, investor protests reached a five-year high last year, while Aberdeen Asset Management, Calpers and Standard Life were among larger investors that told the publication they planned to ramp up the pressure at AGMs this spring. Last week, a third of shareholders at Thomas Cook refused to back pay plans, in the first significant revolt of the year.

But not everyone believes that curbs and stricter measures are a good thing. The British Bankers’ Association has reportedly told the Department for Business, Energy and Industrial Strategy that early indications suggest the current binding votes on pay strategies, introduced in 2013, were “working satisfactorily” and that it was too early to make major changes.

And while PwC acknowledged that executive pay needed reform, it said the “public narrative” on the topic needed to be based on robust evidence to avoid the risk that policies would fail to have the desired effect and lead to further disillusionment. It referred to a number of what it called “myths” around pay, including the idea that the increase in CEO pay over the past three decades was unjustifiable. According to PwC, while the market has a number of weaknesses, “overall pay levels are more readily explained by rational economic forces than is commonly assumed”.