Anthony Hilton: More clarity needed to calm public fears over executive pay

The chairman of one of our largest FTSE companies made a prescient comment when he was asked why he and others in his position were not more vocal in support of the UK’s continuing membership of the European Union. “Business is so mistrusted by the public that I am not sure our intervention would help,” he said.

Some opinion polls detect an improvement in public attitudes to business but, if it exists at all, it is only at the margin. For most voters, distrust remains the norm. According to a paper published today by the Institute of Business Ethics (IBE), the distaste has been fuelled by what the public see as out-of-control executive pay and industrial levels of corporation tax avoidance.

Of the two, pay is perhaps the most persistently corrosive. It saps trust with customers, demoralises employees, causes reputational damage with politicians and brings despair to the broader public, who see average executives get exceptional returns, exceptional executives leave toxic legacies, and mediocre managers enjoy well-cushioned failure.

Even people at the heart of the process — the directors sitting on remuneration committees — have been heard to say they no longer believe it delivers acceptable results. The view is quite widespread but the odd outcome, as HSBC found out to its cost, is that even when they dislike the current system, companies and shareholders seem to find it impossible to change. They probably believe that each year that passes without reform makes eventual government intervention more likely, but still they do nothing.

So it makes sense for the IBE to step into the fray. The purpose of today’s paper, written by the respected Peter Montagnon, a long-time figure on the governance side of the Association of British Insurers, the Financial Reporting Council and now with the IBE, is to try to show them a way out of the maze. It seeks to do this not by producing another set of rules but by giving company remuneration committees a structure, a way of thinking and a set of key questions to guide their thinking.

Every company is different and it can be argued that every executive is different, so each package is special in ways that make fixed rules and blanket guidance inappropriate. Recognising this, the key point of the IBE paper is to stress that whatever pay package is eventually offered, it should be rooted in the firm’s culture and be at one with the company’s ethics and values.

It argues that, provided it is true to these principles, the board should be able to justify and explain the package. If it really is grounded in what the board thinks is for the long-term good of the company, there should be no problem in convincing the outside world. But there is a long way to go before we get to that point, and the report does not pull its punches in showing that there is much to dislike about where we are at present.

Thus it neatly skewers those who lazily justify high pay by claiming it delivers high performance, saying bluntly there is little evidence of “meaningful performance targets which really act positively as incentives”. In the same vein, it notes the muddled thinking whereby companies say the prospect of high pay is an incentive to deliver high performance and in another breath say the high pay is a reward for performance already achieved.

The IBE says it stands to reason that if money is to be used to motivate, both sides need to know what is on offer. But astonishingly it alleges that this is often not the case. Packages are so complex that neither side understands them — the committee cannot work out how much it might have to pay; the executive has little idea even after he has earned it why he has been given the money he has. The paper says there is “substantial doubt” in many cases whether the remuneration committee knows what it has agreed to.

While that may be shocking, it does help one understand why they are so bad at explaining things, which brings us to the IBE’s second condition for a successful scheme: someone must be able to explain the rationale behind a particular mix of pay and bonuses and what it is meant to achieve. It notes that recent disclosure moves prompted by changes in the law “simply throw into stark relief the lack of rationale” for the amount of money paid.