Controlling Executive Remuneration: Securing Fairer Distribution of Income and its possible consequences
In November 2018, a report for the UK Labour Party was released by a group of academics and thinkers led by Prem Sikka, Professor of Accounting and Finance at the University of Sheffield and Emeritus Professor Accounting at the University of Essex. The report, entitled Controlling Executive Remuneration: Securing Fairer Distribution of Income, proposes a range of solutions which, combined, it suggests will control runaway pay for executives of Britain’s largest companies.
Sikka and his fellow authors make a strong case for controlling executive pay. For example, they note, in 2014 a typical chief executive at a FTSE 100 company was paid 149.58 times as much as the average British worker, a figure which is both staggering and, even then, moving ever upwards. This severe inequality not only has an obvious negative impact on those at the low end of the income spectrum, but also the economy as a whole: whereas “normal people spend a large proportion of their income on everyday items and this spending has a greater multiplier effect on the economy”, wealthier families tend to spend a greater proportion of their income on speculative goods, which had less of a multiplier effect. Therefore, the authors note, a more equal distribution of income “has a greater beneficial effect on the economy.”
The authors duly note the policy failures that have allowed this to happen, not least the creed of companies volunteering their pay and remuneration information – rather than it being mandatory to do so – as well as the facile idea that shareholders can effectively rein in executive pay. Most importantly, at the heart of the report are a series of policy proposals to make up for these past mistakes: mandatory publishing of pay information, including names and number of employees earning more than £150,000 a year; fit and proper tests for public sector contractors; and ending the “golden handshake” and ceasing all of the other opportunities for companies to give ridiculous sums of money to their top brass.
Perhaps the most radical policy – and the one that has caught the most media attention – is the recommendation to allow stakeholders – a collective term meaning shareholders, employees and customers – to vote on executives’ pay and remuneration. The relevant section of the paper reads: “The remuneration of each executive at large company must be the subject of an annual binding vote by stakeholders, including shareholders, employees and consumers,” a practice that, while radical in the UK, already exists in some form in Germany, Japan and across Scandinavia. While employee involvement in company decision-making has been mooted in British politics for a while (even by Theresa May), the novelty of the idea of customers getting involved in any of those processes has got people talking.
How do Professor Sikka and his fellow authors define a customer? For many large companies in the UK, such as those that provide water, gas, electric and banking services, they suggest that customers tend to be long-term and therefore can be easily identified and asked to vote on their company executives’ remuneration. Other companies, perhaps such as supermarkets, online and high-street retailers, offer loyalty schemes to regular customers and can therefore use these to identify customers invested enough in the company to vote on their executives’ pay. Collectively, the authors provide these stakeholders with a lot of power: “if 20% of stakeholders vote against remuneration policy or remuneration of any executive then all directors must receive a warning,” they suggest, followed by a final warning that triggers a possible re-election of the board if remuneration is rejected again. Taken together, these recommendations provide a comprehensive and muscular mechanism for customers and employees to better determine executive pay.
Can customers act as an effective check on executives?
What is most interesting, however, is the logic behind the proposals. Current remuneration policies, the authors suggest, were created to link remuneration to performance: those executives who perform best will create greater returns for their shareholders, and thus they will be paid better than those who have failed to reach such returns. Though the authors note, with conclusive evidence, that this has been pretty ineffective at linking pay to performance, they imply that their proposals can similarly use remuneration to impact the behaviour of executives.
More specifically, the authors suggest that by allowing workers and customers to vote for executive pay, the proposals will “secure an equitable distribution of income for employees [and] better products/services for consumers.” The reason for this is that executives will want to raise their employees’ income and improve customer service, products and prices in order to ensure greater levels of remuneration. The authors argue that “consumers receiving poor services are unlikely to approve excessive executive rewards.” The authors believe that customers and employees would use their vote to punish executives whose companies were not providing adequate levels of employee or customer satisfaction.
Although we instinctively understand these ideas from the world of electoral politics, the idea that dissatisfied employees or customers should indicate their discontent by voting for lower executive pay is a novel idea, and one which would mark a fundamental shift in how we conceive of the company-employee and company-customer relationship.
The predominant philosophy behind the company-employee and company-customer relationship in the UK has existed for decades: that companies, employees and customers are equal participants in a contractual relationship. When an employee joins a company, each party signs a contract setting out the terms and conditions of the relationship. When either party feels that these terms no longer meet their needs (or that the other party is not holding up their end of the bargain) they can then terminate the relationship by resigning (if they are the employee) or by sacking the employee (if they are the company). Likewise, a customer and, say, an electricity company enter into a similar agreement: the company agrees to provide the customer with electricity, while the customer agrees to pay the company on a regular basis in exchange for that electricity. If the terms of the deal no longer satisfies the customer they can switch electricity supplier. The bedrock of the conception of the current company-employee and company-customer relationship is that the employee and the customer can walk away from the agreement whenever they want to.
As the report lays bare, the modern economy has made a mockery of such ideas. For example, Amazon warehouse employees feel compelled to remain with their employer despite zero-hours contracts, round-the-clock surveillance and low pay because the alternative is no job at all; they are unable to walk away. Meanwhile, utilities companies have a bad habit of drastically increasing their prices after the first 12 months, practically forcing customers to switch supplier lest they be hit with a penalty for their loyalty. Customers that are compelled to change company and employees that have no alternative but to stay – this must be a practical joke from an economy where “choice” is ostensibly the golden rule. Moreover, it is this relationship which underpins executive remuneration: if employees leave the company and customers switch providers, there will necessarily be fewer returns for shareholders who will, the theory goes, reduce executives’ pay as a result. As Controlling Executive Remuneration shows, this logic does not reflect current reality, hence the report’s proposals for reform.
Rather than providing ways in which this philosophy can be better reflected in the modern economy, however, the authors’ recommendations are in fact based on a completely new conception of the company-employee and company-customer relationships. The very premise of the authors’ proposals is that rather than being transitory, relationships between worker, customer and company are in fact more long-term, with employees and customers often sticking with a particular company for at least a few years. For example, it is unlikely that an employee who is only working for a company for a couple of months before moving on is going to be engaged enough to vote for how much their current boss should be paid. Rather than considering them third parties with which the company does business, the report views employees and customers as stakeholders, who have an investment in the company and therefore should be able to take part in decision-making.
What is most noticeable about this shift in thinking is not the premise of the recommendations, but their possible result. Whereas the current system encourages (indeed, often compels) customers or employees to switch companies to look for better services or working environment if they are able to, the report’s recommendations do the opposite: by giving long-standing customers and employees a vote on executive remuneration, and, by implication, reward managers who meet the demands of these customers and employees, the report’s recommendations may penalise those who switch company frequently and reward those who stay for a longer time. The logic of the report changes our view of the company as something you interact with to buy stuff or earn money, and instead an institution that you participate in. The company becomes less like a fruit stall at a market and more like a local council, with specific oversight over the welfare of employees and customers.
The logical next steps of the proposals: nationalisation?
The potential issues this throws up are numerous. The logical next step of allowing employees and customers to vote on executive remuneration is to enable them to vote on a range of other issues. The rate of tariffs, the size of end-of-year employee bonuses and more could be determined by similar stakeholder votes. Indeed, why not introduce more representative forms of democracy in larger companies, with employees and customers elected to boards which have more say over the direction of the company on a day-to-day basis? As soon as employees and customers are introduced in one area of decision making, the obvious question is why not extend these powers into other areas.
While there are opportunities for empowering employees and customers further, introducing elements of democracy into corporate decision-making could equally strengthen the positions of aloof or incompetent leaders. Just as political parties use a range of techniques to influence the way citizens vote, so too could company resources be dedicated to marketing and PR in order to influence employees and customers in relation to key votes, rather than making the genuine improvements that stakeholders want. Improved democratic structures and procedures within companies could therefore merely entrench excessive executive pay by providing democratic legitimacy, especially if company resources are marshalled to the benefit of executives’ abilities to influence.
The final logical endpoint of the report’s recommendations that I would like to highlight here is that companies themselves could become institutionalised. The expectation of private companies, on the whole, is that if everything goes terribly wrong then they will ultimately collapse, just as Woolworths, BHS and Carillion did, with the magnitude of the impact on staff and customers varying wildly between them. But again, this is based on the current conception of the customer-company relationship: if customers are dissatisfied they will no longer engage with the company, starving it of revenues and ultimately leading to its destruction. Under the relationships that underpin Professor Sikka’s report, customers may be more incentivised to remain and vote on decisions to improve the company’s service rather than walk away.
This soon becomes noticeable when one thinks of the other stakeholders who could take part in company decision-making: not just customers and employees but members of the local community whose economy is dependent on the company; the local public institutions who need to work with the company on a regular basis; local businesses who depend on the larger company through supplying or contract work; charities whose beneficiaries may be impacted by corporate decisions. A company’s true stakeholders are numerous and diverse, and representing them all would require regional- or national-level coordination. Taking this into consideration, large companies with diverse stakeholders across the country may become British institutions that are less like Amazon or Cuadrilla and more like the BBC or NHS – institutions with public missions and public oversight. Which therefore leads me to wonder whether the logical conclusion of the proposals is the renationalisation of many of the public utility companies and establishing public, democratic alternatives to the largest companies we have currently. The current, faulty corporate system we have is based on a very specific notion of the company-customer and company-worker relationship; to change that relationship could mean changing the very nature of these companies.
A fundamental shift
Controlling Executive Remuneration: Securing Fairer Distribution of Income therefore implies a much more fundamental shift in how we might conceive of large companies in the future. Rather than tinkering around the edges and dabbling in workplace democracy, the report could ultimately entrench and establish the largest companies as British public institutions, rather than the mortal institutions that we have recently seen disappear from the high street. What wider benefits this would have for the British economy and society remains to be seen. However, more immediately, the unfounded assumptions that customers and workers could shape executive thinking through voting on their pay mean that it is equally far from definitive that these recommendations would reap the positive results for employees and customers that the report’s authors suggest.
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Jon commentates on the ways culture and politics interact.