(c) Institute of Chartered Accountants in England and Wales. Contact ICAEW for permission to reproduce this article., Corporate Governance

How to end excessive pay

Business plays a vital role in building a world of strong economies, but perceptions of excessive pay are undermining its ability to do this. When executive pay is seen as excessive it attracts overwhelming attention as a blatant symbol of unfairness, and the anger which follows overshadows all other business problems and achievements. ICAEW believes that this corrosion can be reversed. We see excessive pay as a business issue which needs to be tackled in a business-like way.

Inspirational leadership requires courage. It also requires the vision to look beyond legal requirements to see the bigger goal, which is public trust and confidence. Board directors have the power to do things differently, and ICAEW’s framework of Connect and Reflect and this action plan are intended to inspire them to change. It is critical that directors accept personal responsibility for altering the impression that they are unwilling to listen, and are resigned to negative media coverage and relentless public hostility about executive pay. Layers of governance in large companies are intended to support directors rather than shield them from personal accountability. Remuneration committees, specialist advisers and reporting requirements have valuable contributions to make, but ultimately, all company directors need to justify decisions on executive pay.

Connecting with the public on pay, reflecting on what is said and taking action if it is required, will require directors to develop and trial new ways of working. We do not underestimate the bravery this will take as the challenge is huge. Even directors who are uncomfortable with the current situation may fear making things worse. However, it is futile to hope that criticism of executive pay will reduce or disappear, and therefore directors must resist the temptation to focus their attention elsewhere.

The need for prioritisation is highlighted by the fact that if pay is seen as excessive it detracts from commercial success and the contribution business makes to economic growth, the provision of jobs and tax revenue.

Connect and reflect

Connect and Reflect is ICAEW’s suggested framework for modern corporate governance. Its central objective is to bridge the divide between those who run companies and society. Connecting and reflecting requires directors to think broadly. We have provided a ten point action plan for boards to follow. A board that ducks any of these ten steps has no grounds for complaint if people outside of the board think that their executives’ pay is excessive.

Changes in the amount or structure of executive pay may be the consequence of following the action plan if a board concludes that their justifications for the current levels of executive pay are weak.

However, better understanding could also result in no change or in an increase in executive pay. By approaching the pay debate calmly and systematically, boards will avoid the temptation to jump to quick-fix solutions or to dismiss interest in executive pay as voyeuristic and uninformed interference. However, boards cannot achieve Connect and Reflect in isolation. All participants in the debate must be encouraged to think about pay in new ways, listen carefully to counter arguments, set aside personal interests and long-held prejudices, and be open to changing their opinions. Arguments in support of current levels of executive pay tend to centre on the importance of wealth creation. In the current environment, these arguments rarely get a fair hearing. We want that to change. All viewpoints deserve a fair hearing.

There is no doubt that our action plan is ambitious, but we sense a willingness to change. Directors know that whatever they decide to pay, company executives will be subject to scrutiny by employees, the public, journalists and politicians. Criticism of payments for failure is just the tip of the iceberg. Perceptions of excessive pay are perpetual, and no longer limited to a small group of executives or companies. The problem is systemic and endemic. Too often, boards maintain the status quo in order to avoid attention, and because failure to meet an executive’s expectations is viewed as a personal slight towards that individual. Succumbing to external pressure is not necessarily a sign of weakness. Boards following this action plan will be in the best position to stand up to any criticism or to make changes if that is the right thing to do.

You can read the whole report from ICAEW here.