Crackdown on ‘Rocketing’ Executive Pay Urged by U.K. Tory

  • ‘Rocketing’ boardroom pay harms trust and business, Philp says
  • Report recommends shareholders have binding votes every year

Action needs to be taken to curb the rapid and “divisive” increase in executive pay in the U.K., according to a lawmaker from Prime Minister Theresa May’s Conservative Party.

QuickTake Executive Pay

“Rocketing” remuneration is fueling public resentment and there is evidence that high pay leads to poor investment returns, Chris Philp said in a report for the High Pay Centre published Thursday. The average FTSE 100 chief executive officer is paid 6 million pounds ($7.9 million) a year, 150 times the income of the average worker, the analysis showed.

“This level of inequality is socially divisive and public opinion is firmly against it,” according to the report.  

High incentive pay can even dent stock returns in the most extreme cases, according to academic research cited by the report, as “overconfidence” leads CEOs to overinvest and pursue “value-destroying mergers and acquisitions.”

Pay ratios should be published and shareholders should hold annual binding votes on compensation, as in Switzerland, the Netherlands and Denmark, the report recommended. It also called for mandatory shareholder committees, with employee representatives attending.

Unhealthy Gap

The proposals echo ideas already floated by May, who spoke of the divisions in British society when she took over from David Cameron in July following the shock Brexit vote. The new premier has pledged to crack down on the “irrational, unhealthy and growing gap” between top bosses and their employees as part of her drive to deliver more inclusive growth.

Currently, binding votes are held every three years and 2016 has seen shareholder rebellions over compensation packages at companies including Weir Group, BP Plc and WPP. In general, a focus on the short term means investors are not exercising “proper oversight,” according to Philp, a member of Parliament’s Treasury Committee.

“It is striking that non-executive directors rarely meet with shareholders until something bad has happened,” Paul Myners, City minister in the last Labour government, is quoted as saying in the report. “They are elected with North Korean-like majorities by uninterested shareholders, selected through a process led by the chairman which would also be familiar to those in Pyongyang.”

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