Wednesday 13 July 2016 1:12 pm

First May, now this lot: HR professional body wants executive pay to be linked to culture

Shortly after incoming Prime Minister Theresa May expressed her views on curbing reward at the top, the body for HR professionals is today calling for executive pay to be linked to culture.

In a new report on company culture, the Chartered Institute of Personnel and Development (CIPD) has called for remuneration committees to be better empowered and to make sure that any decisions they make about rewards are closely linked to culture.

"Positive and healthy cultures are true to their stated values, give voice to people, engage them, and create the best environment for people to perform in, thereby creating value and competitive advantage," said Peter Cheese, CIPD chief executive. "However, as recent corporate scandals have shown, when cultures turn toxic trust breaks down and performance, wellbeing and reputation suffer.

"This is why boards have a fundamental role in understanding the cultures of their organisation and how culture is changing or evolving, as well as leading from the top in the behaviours and values they demonstrate.

"They must also hold management to account to ensure that culture, values and behaviours align, and the decisions the organisation makes enables it perform financially, ethically and sustainably."

Read more: Brexit vote was a "howl of pain" against big businesses

Earlier this week, May kicked off what would have been her campaign for the reins of the Conservative party with a speech promising to crack down on poor corporate governance.

Her pledges included making shareholder votes on executive pay binding rather than merely advisory.

Leadership hopeful Michael Gove also promised to put pressure on executive pay as part of his bid for the top spot, while adding he would tackle the scandal of the "undeserving rich".

Commenting on the CIPD's research, Arpita Dutt, partner at Brahams Dutt Badrick French, said: 

The call from the CIPD to link executive pay to a company’s culture certainly makes good sense – a toxic company culture can be very detrimental to employees’ wellbeing and motivation. It often goes hand-in-hand that a company with an untrusting and unsupportive culture is also marred with scandal, harassment and misconduct claims.

However, from a legal perspective, difficulties arise when linking remuneration with culture and it is unclear how a company’s culture could be measured if the CIPD’s recommendations are followed. Quantifying a company’s values and how they compare could be very difficult.

David Pitt-Watson, executive fellow – finance at London Business School, added:

We rightly encourage employees to work as teams, to recognise the contribution of others, to believe that their hard work will be rewarded by cooperation in creating long term value. But those ingredients for success grate with excessive pay awards for those at the top, based only on share prices determined by the stock market.

The same rules which apply for most employees, must surely also apply to the top employees.

The CIPD's study will form part of a wider report on culture by the Financial Reporting Council. 

This year's AGM season had an air of a shareholder spring about it, with a revolt over executive pay at BP and resolutions passing by the narrowest of margins at the likes of Man Group and Anglo American