Pension scheme investors 'considering link' between corporate culture and executive pay

The pay ratio between FTSE 100 chief executives and full-time workers has been calculated as 120:1 by the High Pay Centre and CIPD, making 4 January 2018 the date by which chief executive pay will have matched or exceeded the annual earnings of the average worker this year. These figures "symbolise how too many companies fail to understand or appreciate the value of their workers", according to Luke Hildyard of the PLSA.

"Pension scheme investors use information about the employment models and working practices of the companies they invest in, including the pay gap between the top executives and the rest of the workforce, as indicators of the corporate culture," he said. "As long-term investors, pension funds think that boards should be more sceptical about the need for vast executive pay awards and focus on explaining how they are fostering innovation, improving productivity and developing a positive employment culture throughout their organisations."

Pension funds currently invest around £2.2 trillion into the economy, accounting for more than 60% of all UK institutional investment, according to PLSA figures.

The comments by the trade body are in line with recent regulatory initiatives, said corporate governance expert Tom Garbett of Pinsent Masons, the law firm behind Out-Law.com.

"The Investment Association's recent open letter to accompany its revised Principles of Remuneration urged companies to disclose the ratio of pay between chief executive and the median or average employee on a voluntary basis, ahead of government action to make publishing pay ratios mandatory," he said. "The PLSA moves a step further, explicitly linking employment culture and executive pay and noting that an explanation of that connection is something that pension scheme investors will now look for."

"This echoes regulatory efforts. The FRC's recently-published proposals for a revised UK Corporate Governance Code require premium listed companies to report on the board's curation of an appropriate organisational culture, promoting the company's values, and on what engagement with the workforce has taken place in order to explain how executive remuneration aligns with wider company policy," he said.

Share plans and incentives expert Suzannah Crookes of Pinsent Masons said that companies were already beginning to "consider and implement specific reward structures designed to incentivise good behaviours in the workplace and so to support development of a positive culture amongst employees".

"With the changes proposed to the Corporate Governance Code, and comments such as this from the PLSA, we would anticipate that these sorts of structures will become more widespread as companies look for positive means to enhance organisational culture, beyond simply penalising particular examples of misconduct," she said.

The government announced in August that listed companies would be required to publish and justify the pay ratio between their chief executive and average UK worker, as part of its package of reforms to UK corporate governance. The requirement is to be taken forward by way of secondary legislation and through reforms to the UK Corporate Governance Code, and is expected to apply to the majority of premium-listed companies on a 'comply or explain' basis in 2019.

The Financial Reporting Council (FRC) published its proposed changes to the UK Corporate Governance Code last month, and is consulting on them until 28 February 2018.