Curb bosses’ pay or risk breakdown of trust in capitalism, MPs warn

Big companies should split their profits with staff and give employees a say in how chief executives are paid, or risk a complete breakdown of trust in the capitalist system, MPs have said.

A report by the business select committee said a series of “shaming” decisions – including a £75m bonus handed to the boss of housebuilder Persimmon – showed a need for fresh curbs on “executive greed … baked into the remuneration system”.

Proposals made in the report include:

• Workers to join company pay committees.

• Profit-sharing schemes to benefit staff.

• Reducing “variable pay” bonuses.

• An absolute cap on bosses’ remuneration.

• A new financial regulator to monitor pay schemes.

The Labour MP Rachel Reeves, who chairs the committee, 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.

“When the company does well, it is workers and not just the chief executive who should share the profits.”

Warning that faith in Britain’s economic system could be undermined by failure to address high pay, the committee said that without major reforms there would be a “perception of institutional unfairness that, if not addressed, is liable to foment hostility and undermine social cohesion and support for the current economic model”.

The report found that executives were still enjoying pay packages that were often “patently unjustified”, despite a promise by Theresa May to tackle corporate excess.

Over the past decade, the pay of the average FTSE 100 chief executive has risen four times as fast as that of their employees to reach £4m, compared with an UK average salary of £29,600.

Luke Hildyard, the director of the High Pay Centre, a thinktank that researches executive salaries, said: “Excessive executive pay is a key driver of the painful economic divides that exist within the UK. When the typical FTSE 100 CEO earns the average UK worker’s annual salary in under three days, it shows that too many business leaders have lost their sense of fairness or proportionality.”

Among a series of proposals designed to address the imbalance, the committee said remuneration committees, which set company pay policies, should include at least one employee representing the interests of the workforce.

Companies should also make greater use of profit-sharing schemes to ensure staff reap the benefits of strong financial performance, which can trigger large bonuses for directors.

Schemes that hand bonus shares to executives, known as long-term incentive plans or LTIPs, should also be adjusted to make sure the awards are drip-fed over a longer period, while the variable element of pay should be curtailed to prevent “exorbitant” payouts.

The report highlighted controversial deals handed out at Royal Mail, Unilever and Persimmon, where bonus payouts were fuelled by the taxpayer-funded help-to-buy scheme. Jeff Fairburn was ousted as chief executive of Persimmon last year after the firm admitted his £75m bonus had become a “distraction” amid heavy criticism of the award.

Fairburn’s award was “just the most egregious of a number of shaming decisions”, they said, adding that in some cases payouts were so high that they could have funded investment or been shared among thousands of staff.

To prevent a recurrence of multimillion-pound deals that seem “incomprehensible” to the public, company pay committees should set an absolute cap on the amount bosses can take home, the MPs said.

The Institute of Directors, which represents company bosses, said it backed reform of remuneration policies that generate “volatile and unpredictable” payouts.

But Roger Barker, the IoD’s head of corporate governance, stopped short of backing worker representation on remuneration committees. He said: “Would they share the fiduciary duties of other directors? Would they be in a position to integrate discussion of remuneration issues with the overall strategy of the company?

“Although superficially attractive, we doubt that such a measure would be a positive step forward for UK corporate governance.”

Other proposals include forcing all companies with more than 250 employees to publish the ratio of workers’ earnings to bosses’ pay and preventing firms from gaming the system by disguising pay rises inside pension increases not available to staff.

The report also backed calls to replace the under-fire accounting regulator, the Financial Reporting Council, and said its successor should have tough powers to stop over-generous pay schemes.

A spokesman for the Confederation of British Industry, the business lobby group, said: “The CBI has always been clear that high pay is only ever justified by outstanding performance.

“The most successful companies listen to and learn from their customers, employees, suppliers and communities. It is for shareholders to hold our largest listed companies to account and ensure that their reward structures are appropriate.”