Accountability vacuum for exec pay packages is ‘big concern’
By Rebecca Lowe
Two-thirds of bosses believe senior executives are overpaid, according to a survey by accountancy firm Grant Thornton, with the figure rising to 77 per cent in the UK. The report follows revelations that the pay of Britain's top bosses is rising at more than five times the rate of the average employee, who has seen a decrease in wages in real terms, according to Income Data Services (IDS).
Pay reforms proposed by UK Business Secretary Vince Cable in January aimed to tackle this issue, but were significantly watered down following consultation. A compulsory binding vote will now be required every three years – rather than the annual vote originally proposed – alongside a single amount for the total pay of each executive.
Yet one key issue that remains unresolved is that of remuneration consultants. For many years, pay decisions have been effectively outsourced to a small number of powerful consultancies, which have expertise and resources unavailable to time-poor directors. With the role of remuneration committees set to expand over coming years, concerns have grown over their perceived lack of accountability and independence.
Deborah Hargreaves of the High Pay Centre, on remuneration consultants
‘There is something of an accountability vacuum here, which is a big concern,’ says Deborah Hargreaves, director of the High Pay Centre, a think tank dedicated to reducing pay inequality.
‘It is sometimes easy for committees to hide behind the consultants’ report and say it’s based on objective market data. There is a developing feeling that committee members should be better informed, rather than relying on consultants – just as audit committees have accounting experience.’
A main criticism levied at consultancy firms involves conflicts of interest arising from cross-selling. According to a Guardian survey, 33 of the 50 biggest UK public companies hired pay consultants who also sold services to other parts of the same company during 2011. These included Barclays, which employed Towers Watson for both remuneration and pensions advice, and AstraZeneca, which employed Deloitte for both remuneration and tax advice.
Providing such advice is a lucrative business, with top consultancy firms charging up to £500 an hour. Last year, Towers Watson’s highest paid director earned £693,000 – nearly twice the amount earned five years ago.
‘There is something of an accountability vacuum here, which is a big concern'
High Pay Commission
Following criticism of cross-selling, leading consultancies drafted a code of conduct in 2009. The code requires consultants to disclose to the remuneration committee the ‘scope and cost’ of work provided to the company, in addition to that provided to the committee. Yet there is no requirement to publish this information, and, three years on, the reforms seem to have had little impact.
‘Within the accountancy sector, the issue of cross-selling audit services was dealt with a number of years ago,’ says Mark Ife, employment partner at Herbert Smith. ‘However, consultants are still able to cross-sell services such as tax consultancy, mobile employee monitoring, drafting of share plans and pension services. Whilst some of these areas are directly linked to the advice provided on remuneration, such consultants need to be careful that they continue to provide independent advice – which often means providing advice which the client does not necessarily want to hear – bearing in mind that they are advisers to the remuneration committee and not necessarily to the company.’
Harvard Law School
Yet the line between committee and executive can be unclear, says Hargreaves. ‘They are hired by the remuneration committee, but they will also sometimes meet the chief executive. Consultants are very aware of the pressure of the exec on the committee and what his interests are.’
Indeed, for Harvard law professor Jesse Fried, who specialises in executive pay and corporate governance, the central issue concerning consultancy firms is not cross-selling, but lack of independence. Single-purpose firms may have more incentive to please their client than diversified ones, he believes, as their sources of business are more limited. ‘What really matters is the willingness of directors to negotiate a pay package that serves shareholders. If the directors want to be hardnosed with the CEO, the consultants will help. If they want to be soft, the consultants will help with that. They are mainly interested in serving their customers – here, the directors.’
As the role of remuneration committees develops further, consultancies are likely to assume even greater powers. Though historically seen as public company entities, following the January 2011 revised Financial Services Authority code committees are now required at the largest banks and building societies. In July 2013, the Alternative Investment Fund Managers Directive will extend this requirement to hedge funds, real estate funds and other alternative funding mechanisms.
‘It’s a much wider group of people that those remuneration committees are looking at,’ says Ife. ‘They are not just looking at the main board, they’re looking at all those individuals in financial services firms who are having a material impact on risk profile. And that will have a knock-on effect in the plc world, as shareholders will say: "if remuneration committees within financial services firms have a wider remit, why are we focused only on directors?" ’