Labour’s say on pay

The Labour Party has pledged to require companies to place worker representatives on remuneration committees if elected into government this May (a feat believed to be likely). IF Labour is elected, and IF they stick to their promises (both big “Ifs”), the UK will join a small list of countries that require boards to include employees in the decision-making process.

There has been a pervasive tendency for boards to equate the best interests of the company with the best interests of the shareholder. This view ignores the reality that companies operate in a wider sphere. Many stakeholders can be affected by a board’s decisions, including employees, suppliers, consumers and members of the general pubic. By expanding membership on remuneration committees, boards will be encouraged to consider the interests of stakeholders other than shareholders.

Remuneration policies are cloaked with language that caters to shareholders. Policies tend to incentivize executives to focus on maximizing shareholder value and total shareholder returns. Employees, however, care far more about the quantity, quality, and conditions of work than they do about the share price. Workers will tend to favour remuneration policies that incentivize executives to expand employment and improve working conditions. In considering if an executive has earned the rewards given to him, an employee might ask whether employees have been laid off or hired? Received salary increases? Been treated fairly? Worked in safe conditions?

Additionally, employees are more likely than shareholders to balk at the levels of pay being doled out to executives. Shareholders have a tendency to approve remuneration policies when the company is performing well and complain about pay only when the share price starts to fall. Employees, on the other hand, are more likely to consistently care about the fairness of an executive’s pay level, especially in comparison to pay levels for the rest of the work force. The employee representative will be able to ensure that high pay levels are addressed every year rather than only in years of poor share performance.

There is no question that Labour’s pledge to include an employee on remuneration committees will make the work of remuneration committees much harder. However, there is also no question that changes need to be made to executive remuneration policies and that this will require hard work. A voice of restraint is needed if restraint is to be achieved. Let’s hope that Labour sticks to its promise if elected this May.

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