Rein in 'naked greed' of company bosses or watch public lose faith in business, MPs say
The UK's entire economic system could be undermined unless firms do more to tackle the pay gap between workers and executives, MPs have warned.
A blistering report from the cross-party Business, Energy and Industrial Strategy Committee said that “huge differentials” between executives' and workers' wages had been “baked into the pay system” of major UK firms - as they warned the "naked greed" of firms was putting the UK economy at risk.
Analysis shows that CEO earnings have increased four times as much as national average earnings in the past decade, with FTSE 100 chiefs trousering an average of £4m each year - compared to the average UK salary which is under £30,000.
But in a stark warning, MPs said “reputationally damaging” pay awards from firms such as BT, Royal Mail and housing firm Persimmon risked growing “hostility” and undermining “social cohesion”.
The report instead called for firms to move away from “over-generous” incentive-based schemes by creating stronger links between bosses' and workers' pay, as well as setting a strict cap on renumeration which would be published annually.
And they urged businesses to include workers in profit-sharing schemes, as well as increasing representation of general employees on renumeration boards.
Committee chair Rachel Reeves said: “Eye-watering and unjustified CEO pay packages are corrosive of trust in business and threaten to undermine the public’s support for the way our economy operates.
“The roll-call of dishonourable executive pay decisions at firms including Persimmon, Unilever, Royal Mail, BT, Melrose and Foxtons, tell the all too familiar tale of corporate greed which is so damaging to the reputation of business in our country.
“But these examples also highlight the persistence of executive pay policies where far too little weight is given to delivering genuine long-term value, investing in the future, or ensuring rewards are shared with workers.”
Speaking before becoming Prime Minister, Theresa May hit out at the “irrational, unhealthy and growing gap between what the companies pay their workers and what they pay their bosses”.
But the committee warned that little effort had since been made by ministers to tackle soaring executive pay.
And they said that regualator the Financial Reporting Council remained “underpowered and passive”.
Ms Reeves added: “When the company does well, it is workers and not just chief executives who should share the profits. Why should chief executives have a more generous pension scheme that those who work for them?
“Getting workers on renumeration committees and including staff in profit-sharing schemes should be the first steps to this end. Investors and renumberation committees have too often failed to rein in pay. When they fail, we need a regulator with the powers and mindset to step in and get tough on businesses who pay out exorbitant sums to their CEOs.
“Public scrutiny has often had more influence than investors or renumeration committees in getting companies to reverse outrageous executive pay decisions.”
A spokesperson for the Department for Business, Energy and Industrial Strategy said: "Britain has a well-earned reputation as one of the best places in the world to work, invest and do business and the vast majority of our biggest companies act in a responsible way.
"We do however, understand the frustrations of workers and shareholders when they see executive pay out of step with performance.
"That is why we introduced new pay ratio and corporate governance regulations in January to make businesses more accountable for executive pay.
"These new regulations are a cornerstone of the corporate governance upgrades we are implementing to help us build a stronger economy that works for UK businesses and workers."