Executive Pay Also an Issue in the UK

News Brief

By Cydney Posner

From the New York Times, an article regarding the furor in Britain over executive pay: The UK has had non-binding say on pay for a number of years, apparently to little effect. Now, investors and the government officials, including two of the country's biggest investors as well as Conservative Party Prime Minister David Cameron and business secretary, Vince Cable, are promoting other ways to shrink excessive pay packages. The article reports that Mr. Cable is expected "to present proposals for a fairer compensation system, including giving shareholders veto power over pay packages and making them more transparent." Large investors are particularly annoyed about large paychecks in the wake of crumbling stock prices. According to the article, total "average pay of chief executives rose 33 percent in 2010 while average company market values grew by 24 percent, a report by the Institute for Public Policy Research showed. A separate study by the London School of Economics discovered that a 10 percent increase in a firm's market value was generally followed by an increase of 3 percent in the chief executive's pay but only a 0.2 percent increase in average workers' pay.

"Public anger grew after newspapers reported plans for million-pound pay packages for senior executives at Barclays even though the bank's share price slumped more than 30 percent last year. The Royal Bank of Scotland is to award its head of investment banking another large sum even though the bank announced thousands of job cuts. Cairn Energy, the oil explorer, attracted some criticism from investors last month for suggesting a £4.9 million, or $7.6 million, award for its chairman to incentivize him to sell some assets.

"Mr. Cameron made it clear that he did not object to large bonuses for successful executives but was concerned about the disparity between pay and performance and the growing gap between the pay of executives and the average worker.

"Executive pay at Britain's top 100 publicly listed companies for 2010 rose on average by 49 percent compared with 2.7 percent for the average employee, according to a report by the High Pay Commission, a pressure group. At the oil giant BP, for example, the former chief executive Tony Hayward earned 63 times the amount of the average employee in 2010, the year he left the firm. In 1979, the multiple was 16.5, according to the commission."

One shareholder advisor quoted in the article cautioned "against relying too much on shareholders to fix the issue. Evidence showed that many large shareholders were reluctant to collect the relevant information to make decisions and vote on pay, she said.

"The Office for National Statistics estimates that more than 40 percent of British company shares are now held overseas, many are short-term investors, and few want to spend time pondering executive pay if they own 1 percent or less of a company. "

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