Should employees have a say in setting executive pay?

The parliamentary select committee says there should be more transparency

MPs have agreed that organisations should listen to their employees when setting the pay packets for their executive boards, with a parliamentary report criticising the eye-watering pay packages set for many CEOs.

A report on “Executive Rewards: Paying for Success”, from the Business Energy and Industrial Strategy Committee, calls for employees’ views to be taken into account by remuneration committees. The parliamentary select committee says there should be more transparency in how pay packages are developed and greater accountability from those responsible for determining the rewards that executives and employees receive in order to develop a fairer remuneration system.

With FTSE 100 CEOs apparently earning on average £4 million a year, and the average salary for a full-time worker being less than £30,000 a year, the report criticises the fact that employee and executive pay packages are not determined in a more connected way. The BEIS Committee says that more workers should benefit from initiatives such as profit sharing, and companies should have employee representatives on remuneration committees, so that it is not just the chief executive that receives a significant reward if a company does well, with profits instead being shared among the workers as well.

Without this involvement, the trust between workers, the business that employs them and the executives leading that company will be eroded and this would threaten the public support for the way the economy operates, says committee chair, Rachel Reeves.

The CIPD says that broader measures of success than pay packages should be developed and awarded to deserving executives and workers across any organisation. According to CIPD reward and performance adviser, Charles Cotton, companies should be looking more broadly at how people are managed and developed as well as at how they are rewarded, with employees included as part of the governance process.

Many organisations that are already involving employees in remuneration committees have testified to the success of this approach, with wide-ranging employee engagement seen as the most effective method, compared to electing one individual to represent all workers.

Governance challenges may come from appointing people without a formal role as a board member, according to the Institute of Directors’ head of corporate governance, Dr Roger Barker, who warns that there are questions about whether employee representatives would be in a position to influence remuneration discussions only and how this ties into the overall company strategy.

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