Vince Cable, former Secretary of State for Business, Innovation and Skills, recently spoke to attendees at a High Pay Centre event about whether the 2013 Enterprise and Regulatory Reform Act had been effective in tackling the executive pay problem. Among other requirements, the Act directs companies to disclose a single figure for executive pay and to hold a binding shareholder vote on their remuneration policies.
According to Cable, while the regulations have had “some” effect in forcing institutional shareholders to think more about the long-term impact of remuneration, they have not had an “enormous” impact. Shareholders and fund managers have been given the information and tools needed to curb excessive pay, yet pay continues to rise.
One reason for the unremarkable response to these regulations is that shareholders are not necessarily the best opponents to income inequality. In fact, shareholders are very poor guardians of societal values – they are self-interested individuals with a lot on their plates. To expect them to be concerned enough with income inequality to actually vote against remuneration policies at annual general meetings, or to put pressure on their fund managers to do so, is to expect too much of busy people who, at the end of the day, really only care about the return on their investment. Many shareholders will only be motivated to act if they can see that a company’s remuneration policy is significantly negatively impacting their returns. When a company’s remuneration policy is merely high, but not out of line with what other companies are offering, an individual shareholder may not be motivated to take action, or might erroneously believe that companies need to pay top rates in order to retain their executives.
More important than the individual shareholder is the institutional investor. These individuals are the ones that actually vote the majority of shares at annual meetings on behalf of numerous beneficial shareholders. According to Cable, institutional investors have a lot of issues to take up with companies, only one of which is remuneration. Whether company remuneration receives the attention it deserves depends on what else is on a fund manager’s agenda. Given that fund managers tend to be highly paid themselves, and entrenched in what has been coined the “high pay culture” by the High Pay Centre, it is unlikely that these individuals will put sufficient energy into tackling a remuneration problem that ultimately benefits them personally.
So what is to be done? During his remarks, Cable recognized a void in the 2013 regulations that could potentially be addressed through future amendments. While the Act gave shareholders tools to tackle executive pay, it largely ignored the role of the employee. Cable was supportive of requiring companies to disclose pay ratios and also to declare whether or not the company had consulted the workforce over its remuneration policy. His hope was that these regulations would cause companies to exercise greater restraint. However, Cable cautioned that over-regulation in this field would have the opposite effect: if you bring too much pressure to bear on executives and their pay, they will simply take their companies private.
Regulations designed to empower shareholders can only take us so far. Shareholders are primarily concerned with their own pocket book. More actors are needed to bring pressure to bear on companies and change the culture of pay. A step in the right direction would be to involve employees in this process and not only arm them with information about the pay differentials within their companies but also consult with them when drafting remuneration policies. A requirement to disclose pay differentials in a company’s annual report would also arm consumers with information to avoid supporting companies with extreme differentials. This will not solve the pay problem entirely – but it would take some of the burden off of shareholders.