February 3, 2012 Cameron muddled on employee representatives
The government is clear that it doesn’t want compulsory employee representation on the remuneration committees of listed companies but, following David Cameron’s recent performance in prime minister’s questions it is even less clear why they don’t want this.
The High Pay Commission report on executive pay published in November 2011, had as its fifth recommentation:
5. Include employee representation on remuneration committees
The High Pay Commission has found remuneration committees to be a closed shop, made up largely of current and recently retired executives. This model has failed, leading to spiralling pay. We believe that greater engagement with employees may help restrain executive pay and help mitigate negative impacts on morale as well as encourage a greater engagement with the workforce. We therefore call for employees to be represented on remuneration committees as a first step to better engagement and accountability.
Although the High Pay Commission wasn’t a government project, it has been enthusiastically adopted in many areas. When Vince Cable announced the government’s proposals to curb executive pay, he proudly claimed that they had adopted 10 of the 12 recommendations of the High Pay Commission. However recommendation 5 (above) was one of the two left out; the other related to the pay structure of executives.
Vince Cable did talk about the benefits of a diverse board and remuneration committee, but he didn’t go in to any detail as to why the government shied away from requiring employee representatives on the remuneration committee. It would be a huge shift from the UK’s current corporate governance regime, but it is far from unheard of. Germany is undoubtedly the best example where they have had mandated employee representatives for many years and it seems to work well there.
So hoping for more information on this subject, we turned to Prime Minister’s Questions (1 February 2012), where Ed Miliband asked David Cameron why the government hadn’t adopted this recommendation. In his response David Cameron said the following:
It breaks an important principle of not having people on a remuneration committee who will have their own pay determined, so I do not think that it is the right way forward.
Now, remuneration committees do not decide on the pay of ordinary employees; their remit is solely to determine the pay of the executive board members and, sometimes, certain other senior executives. The board as a whole have the responsibility for determining the pay of the company’s other employees and therefore there shouldn’t be any conflict around an employee representative sitting on the remuneration committee. This is a fundamental part of UK corporate governance and it is a bit disturbing that the prime minister doesn’t seem to understand it.
Whether or not it is sensible to have mandated employee representatives on remuneration committees, (which is an issue to large for this article) the government should at least give sound reasons for its decisions which, at the moment, doesn’t seem to be the case.