Don't say you weren’t warned. Britain’s big listed companies have, in recent years, been told loud and clear – reform your executive pay structures before the government storms in and does it for you. The Institute of Directors, for example, has been preaching this message in the hope it could ward off any populist interventions before they were even concocted.
It didn’t take much for the political climate to change. David Cameron may have restrained Vince Cable when the former MP for Twickenham was business secretary for the coalition government, and he may have defeated Ed Miliband at the ballot box, but ultimately there was always going to come a time when Number 10 was occupied by someone with a more strong-armed approach to the world of business. Someone who, to quote Prime Minister Theresa May, believes zealously that “government [must] step up – and not back – to act on behalf of the people”.
Downing Street insists it will work constructively with business as it formulates a plan to reform pay structures. But we should be under no illusion – after U-turning on May’s pledge to force companies to put workers on boards, the government will want at least one headline-grabbing initiative to show for itself. May is determined to avoid any further appearance of going soft on business.
The problem with this approach is the disconnect between political point-scoring and the need for changes that will make a genuine, positive difference to how big companies reward their top staff. Remuneration is an extremely complex issue; organisations across all manner of sectors, along with a string of academics and consultants, have struggled for years to design fair, accurate, and effective systems for paying staff according to their performance.
Getting it right requires experimentation. It requires debate. It requires incremental reforms. All the things remuneration committees should have been embracing to satisfy justifiably angry shareholders in recent years.
The worry now is that any such organic, voluntary process is stamped upon by politicians’ desire to enforce easily-comprehensible measures such as the publishing of pay ratios. These could be harmless, but whenever the government looks towards blunt instruments there is a danger of unintended consequences making the situation worse, rather than better.