Finance

Chris Hughes is a Bloomberg Gadfly columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

Britain's probable next prime minister wants shareholders to have a binding vote on what executives are paid. That would be a pointless tweak to a system needing more radical change.

Theresa May is right to want to use public policy to address corporate pay. British business has a major perception problem with remuneration. That undermines its credibility and is probably part of the reason why so many Britons ignored the warnings of U.K. corporates about leaving the EU, or saw them as self-serving. Institutional investors are angry too. The most recent set of company annual meetings included a rash of protest votes against specific pay packages at some of the U.K. top companies.

The government of outgoing premier David Cameron continued reform of executive pay after coming to power in 2010. Shareholders in British companies currently get a binding vote on the board's overall pay policy, plus an advisory vote on how that policy played out in practice over the previous year. May seems to want to make the latter binding too.

It's hard to see what this would achieve. There's a big practical problem: the vote would be on what had already been handed out. Clawing back what has already been paid has legal and practical complexities.

There's a more fundamental problem. Shareholders just don't know what they are voting on right now because executive pay has become so complex. Hence the absurd situation in April when BP shareholders voted against the pay of CEO Bob Dudley despite having earlier overwhelmingly approved the policy that made it possible. 

A typical FTSE-100 pay award will include a base salary, benefits, pension contributions, an annual bonus and a long-term share award. The bonuses will be based on a blended performance against targets including shareholder returns, financial results and operational metrics. To make things simpler, companies have to give a single number for what was paid. But this still relies on a host of assumptions. Some companies will give an "expected value" in the footnotes of the annual report for what long-term share awards are worth as a percentage of face value -- perhaps a conveniently round number like 50 percent -- but it's hard to know if that's correct.

It would be surprising if CEOs themselves knew precisely what the value is of their pay at the point it's awarded. Given that uncertainty, they may have one natural response: demand more.

Votes, binding or otherwise, are meaningless if investors have no idea what they're voting on. A more sensible policy would be to simplify pay more radically, with a much higher percentage in cash. A decent wage, coupled with a desire to do a good job and the reputation that comes with achievement, should be enough to motivate a corporate leader. A link to the share price could be maintained via a requirement to reinvest pay in company stock.

May has hit on the right problem and businesses can't complain. But a say on pay is useless without knowing what pay really is.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Chris Hughes in London at chughes89@bloomberg.net

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net