Government Regulation Is Necessary To Limit Excessive CEO Compensation In The UK - Paper Example

Introduction

The issue of excessive compensation is one of the hottest topics today in the business and corporate world. The handling of the problem also promises to be a laborious undertaking, which may not be readily agreed upon. Companies all across the globe grapple with the issue, from the United States, Canada, the United Kingdom to others. The United Kingdom, however, ranks top when compared to the rest, notwithstanding that the median wages in the country are lower than the rest. The impact of such inflated rates of executive payment in the western world according to 'The Management Online' (2016), is a growing level of inequality and much financial crisis. At the helm of this problem are various policy and payment optimization mishaps and considerations that have informed the worsening of the problem in the previous years (Frank, 2018). This paper looked at some of the policies and guidelines along with reviews for executive pay in the United Kingdom with the aim of providing recommendations regarding the issue of regulating the pay packages.

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Regulation Policies

Among the leading countries with policies promoting high compensation for corporate executives, the United Kingdom ranks top. Most of The CEOs receive most of their pay, 59% from base salaries, bouses making up to 18%, share options adding up to 10 percent and LTIP shares accounting for 9% of the pay package and valued at grant date. Compared to this, CEOs in countries like the United States earn a significant portion of their pay package from share option grants, comprising over 40%, while the base salaries comprise only 30% of the whole package("Executive pay: review of FTSE 100 executive pay packages | Reports | CIPD", 2018). Critics have pointed to such high compensation packages as contributing to the rising inflation levels in the country. The various policies formulated by the government to check the discrepancies are partly to blame for the disparities, causing public mistrust of the corporate culture. Furthermore, the widespread practices among companies and businesses do not reflect the skills and abilities of those that benefit, the source being an overreliance on outdated financial theories. As such, it would seem plausible to limit the compensation packages of CEOs.

One of the policies adopted in the compensation of corporate executives is the performance related payment structure. Here, the risk discounts accorded to the CEOs in running their companies allow them to earn more for better performance. This notion is reinforced by the fact that little difference in managerial talents makes a huge difference in profit when dealing with large companies. The emphasis thus placed on the acquisition of the top talent leads to a necessity of the high compensation packages for the involved candidates (Greenberg, 2010). In contrast, adopting a strategy that offers the prospective candidates for a CEO position a smaller, regular pay package might discourage them from taking up the post and instead focusing their talents elsewhere. Furthermore, those already in the company but feel inadequately compensated may also divert their talents elsewhere they deem better. This action therefore forces companies to pay their CEOs high salaries and remunerations to benefit from their abilities more("Time for change in executive pay?", 2018).

The focus on long-term incentives to CEOs to improve company performance is also another common practice in business institutions. This policy does not take into account the costs of deferral by the affected CEOs, which could lead to the company accounting for losses in the long run, due to a failure to achieve the desired results. On the contrary, however, the use of short term incentives to drive company growth would not cost the company or institution as much if the employees deffer during their course of employment. In such a strategy, it would be possible to develop talent and retention rates continuously would also be magnified and thus would be more beneficial to the company or institution in the long run rather than offering sizeable one-time pay packages("Controlling UK executive pay | VOX, CEPR's Policy Portal", 2018). At the same time, such strategies could reduce the number and severity of the financial crisis that might necessitate government bailouts, with the affected companies bearing the cost of their business decisions, thus saving the taxpayers money (Greenberg, 2010).

Disclosure requirements and compensation reporting mandated by government authorities in the recent years are bound to introduce extensive sweeping changes in the corporate world as regards the remuneration of top company CEOs. These policies, however, are likely to take not less than a decade to bring about balance in the industry according to Smith(2013). In the Directors' Remuneration Report Regulations guidelines issued by the Department for Business and Skills(2002), it is mandatory for a company to prepare a report detailing the remuneration of the directors. This way the CEO compensation can be pitted against the median level income earners for disparities. A recent release, for example, highlighted that a majority of the CEOs in the United Kingdom are paid over 100 times the average salary. Such disparities lead to a mounting outrage among the general population since they are considered too high and not considerate of the workers welfare. Capping the level of remunerations for top company executives could go a long way in quelling such displeasures and avert a financial crisis and unpleasant situations that could potentially arise as a result.

Another policy recently adopted by most companies in the United Kingdom is the say on pay strategy. Introduced in 2003, the plan directs control measures where the company presents the CEOs compensation offers before the shareholders, who after that vote for or against according to their satisfaction levels. This way, the stakeholders get to have a say in their CEOs remuneration packages, a form of direct corporate democracy that checks the level of executive rewards to correct problems that might be caused by the boards' timidity. It allows for easy expression of sentiment forcing the management to be more careful not to issue excessive rewards in anticipation of the stakeholder votes and thus constraining such proposals (Donatiello, 2017). This policy has in the years that it has been in existence achieved limited success in curbing the rise in pay levels as compared to before 2003. Its efficiency lies in the reliability of the stakeholder committee. Stakeholders were however found to very rarely voice their displeasure with the remuneration packages of their executives. This situation has thus led to an increase in legitimized overcompensation in several instances, contrary to its original intended purpose(Petrin, 2015).

Conclusion and Recommendations

On the view of the issues touching on the excessive compensation of the executive in the United Kingdom, it is no doubt that it is not only an existing but also increasing problem. Despite several measures and means were taken by companies to control the vice, many of those have been a failure with their inefficiency instead promoting the practice further. This is evident by the rising cases of such occurrences and the ever-increasing disparities between the executive compensation packages and the average or median earners' wages. It would seem to be a good measure for the government thus to step in and set the pace in implementing reforms to the corporate sector and its spiraling wage inflation to save the taxpayer potential loses in form of bailouts and others. The recommendations below were arrived at from the study, aimed at addressing the problem.

Given that the competition for top managerial talent is rife in the United Kingdoms' corporate market scene, it is necessary to review the existing structures that determine the acquisition of such talent by companies and interested institutions. Talent poaching sometimes occurs due to the dissatisfaction of one's current conditions and also due to the offer of better pay packages by the next company(Bambrough, 2018). The government could for instance institute a policy for regulating such practices to promote healthy competition among such companies. The emphasis on short-term incentives as opposed longtime remuneration offers would also go a long way in improving talent retention and lower the costs of deferrals in case of an occurrence of such talent poaching practices.

The government should also set in place a better policy implementation framework to hasten the progress of policies already in place to avoid delays that might be costly in the long run. Furthermore, a review framework should be established to assess the implementation progress and encourage stakeholders in companies to be more vocal about their concerns regarding the company remuneration practices. That way, policies such as they say in pay could be implemented more efficiently with the final benefactors being the stakeholders themselves. Stakeholder communities should thus be more empowered to take action and give their recommendations in regards to the remuneration packages of their executive officers. It is by instituting efficient stakeholder committees that other expensive interventions such as bailouts due to excessive risk-taking can be avoided.

References

Bambrough, B. (2018). Here's how executive pay has changed in the UK over two decades | Verdict. Retrieved from https://www.verdict.co.uk/heres-executive-pay-changed-uk-two-decades/

Controlling UK executive pay | VOX, CEPR's Policy Portal. (2018). Retrieved from https://voxeu.org/article/controlling-uk-executive-pay

Donatiello, N., Larcker, D., & Tayan, B., (2017). CEO talent: A dime a dozen, or worth its weight In gold? European Financial Management. Retrieved 20 February 2018 from: http://onlinelibrary.wiley.com/doi/10.1111/eufm.12158/epdf

Executive pay: review of FTSE 100 executive pay packages | Reports | CIPD. (2018). Retrieved from https://www.cipd.co.uk/knowledge/strategy/reward/executive-pay-ftse-100

Frank, R. (2018). Should Congress Put a Cap on Executive Pay?. Retrieved from https://www.nytimes.com/2009/01/04/business/economy/04view.html

Greenberg, M., (2010). Regulation of Executive Compensation in Financial Services. Greenberg Center for Geoeconomic Studies. Retrieved 01 March, 2018 from: https://www.cfr.org/report/regulationexecutive-compensation-financial-services

Petrin, M. (2015). Executive Compensation in the United Kingdom-Past, Present, and Future. Browser Download This Paper.

Time for change in executive pay?. (2018). Retrieved from http://blogs.lse.ac.uk/management/2016/03/07/time-for-change-in-executive-pay/