How shareholders are revolting against fat cat pay
While the UK has been experiencing its worst pay squeeze since the 1860s, with real wages falling nine years in a row, remuneration for senior directors has soared, irrespective, it seems, of performance.
The typical FTSE 100 chief executive took home £5 million in 2014, according to the High Pay Centre - 180 times more than the average UK worker, on £27,600.
Shareholders have been making their feelings known, voting against executive pay deals at dozens of quoted companies in what has been dubbed the 'shareholder spring revolt', with protests at Citibank, BP, Bunzl, Goldman Sachs, Standard Life, Anglo American, Shire, Deutsche Bank, Weir, Ladbrokes, Reckitt Benckiser, Carillion, and CLS, to name but a few.
NO TRICKLE DOWN
At the root of the problem is that UK corporate profits relative to gross domestic product are now at a record 5.75 per cent, according to data from the Office for National Statistics - but that wealth creation is not trickling down.
This failure, as well as being inherently unfair, is also impacting the economy, because while lower and middling earners tend to plough their salary back into the economy, the mega-rich invest the bulk of their earnings in property and offshore bank accounts.
It's the same story across the developed world - in the US directors earn 350 times the average employee.
Firms as well-respected as Hermes Investment Management argue that the EU referendum has also exposed divisions in UK society that makes reform of executive pay an urgent matter, and that pay disparity has added to the country's productivity problem.
Remarkably, prime minister Theresa May pledged tighter controls in her first few days in power.
She proposed employee representation on boards, the imposition of maximum pay ratios (the ratio of the chief executive's pay relative to that of the average worker in a company) and for annual shareholder votes on pay to be binding rather than advisory.
The current regime, introduced by Liberal Democrat Vince Cable in 2014, forces companies to hold legally binding votes on future pay policies only every three years.
This explains why most shareholder revolts to date have been powerless to change anything, as almost all votes have only been advisory. The first round of binding votes will take place in 2017.
Engineering group Weir has been an exception, suffering a 70 per cent vote against proposals in a binding pay policy which forced it to abandon share option awards for its management team.
'These are firm initiatives that Theresa May has come out with, and we should applaud them,' says Stefan Stern, director of the High Pay Centre.
'Having employees on boards will create a reality check. One of the problems is that there is little perspective from an ordinary person's point of view.'
Supporters often point to transport company FirstGroup as a case study where employee representation on the board has worked well, bringing in-depth knowledge of how the company operates to strategic discussions.
More generally, employees' interests are well-correlated with a company's long-term interests.
The prime minister's announcement took the Institute of Directors (IoD) by surprise. 'For a prime minister to be prepared to talk about governance is very unusual,' says Oliver Parry, director corporate governance at the IoD.
'What she has identified is problems with the reputation of business. Although the large Footsie companies for the most part came out against Brexit, they could not persuade people to support them.'
He adds, however, that a retrospective vote each year on pay would cut across employment contracts and lead to litigation from executives forced to surrender elements of pay deals already awarded to them.
One reason why pay has risen exorbitantly is that remuneration committees use compensation consultants, who typically look at executives carrying out similar roles in comparable companies and just add a small uplift to this benchmark.
Remuneration for board directors is also unnecessarily opaque, with 60-80 per cent tied to performance measured by quarterly earnings or stock prices, and paid in complex leadership equity acquisition plans, bonus deferral plans and share-based schemes.
But it's impossible to assess the individual contribution of a director when decisions in a business are taken by all sorts of managers. Moreover, performance-related pay can encourage short-termism.
'Often hurdles are too soft, and directors are rewarded for just doing the job,' says Neville White, head of SRI policy and research at EdenTree Investment Management.
'We also believe that if a company has underperformed in the previous year, then they should scale back the grant; where health and safety is a priority, such as in chemicals, oil and gas, then there should be incentives directed to that end, and they should be scaled back in the event of an accident.'
Some of the most controversial awards have been seen at housebuilders such as Persimmon and Berkeley Homes. The concern is that these firms are succeeding at the expense of a wider society facing a housing crisis.
Persimmon, for example, faced protests that its share scheme could hand £600 million to 150 directors by 2022.
Similarly, at Berkeley boss Tony Pidgley received a £23.2 million payout after profits soared by 42 per cent - his first instalment in a series of payouts to the housebuilder's top executives that could top £500 million over six years.
For investors, it is difficult to make generalisations about excessive pay and its impact on profitability. Hindsight is a wonderful thing. No one blanched, for example, when Sir Philip Green's family firm Taveta took dividends of £400 million from British Homes Stores in 2002-04.
Other companies have performed well even though they've been ruled like fiefdoms.
Sir Martin Sorrell tops the pay league with around £70 million at WPP, but the advertising giant's share price has tripled over a decade, and as Sorrell approaches 72, many investors are more exercised about succession planning than his pay packet.
In contrast, BP shares are below their level five years ago, and 60 per cent of shareholders voted against the £13.8 million pay deal for chief executive Bob Dudley, which incorporated a 20 per cent rise despite the oil major's worst ever loss.
Other energy bosses took pay cuts in 2015, when the oil price crashed. However, shareholders were not sufficiently perturbed to vote Dudley out of office.
Investors can also look at the non-executives appointed to enrich a board's experience. In the aftermath of the Deepwater tragedy, some investors took comfort from BP's appointment of Admiral Frank Bowman on account of his experience commanding nuclear submarines.
There is always a judgement call whether the involvement of such a figure is window-dressing, or a genuine challenge to 'group think' that adds a fresh perspective.
Cases where investor pressure has forced a company to focus properly on shareholder value are still relatively rare.
Russ Mould, investment director at AJ Bell, says one reason investors should back companies with good governance is because in any kind of portfolio, avoiding accidents is more important than picking winners.
He applauds Next, which sets out its strategic priorities in its accounts every year, making it absolutely clear how it allocates money to managers, the business and shareholders.
Chip-builder ARM Holdings is also good at communicating its strategy, and has built itself a competitive position, throwing off cash to pay dividends and share buybacks in recent times.
Mould also likes family-run concerns such as Aim-listed floor covering firm James Halstead, which has raised its dividends for the past 30 years.
Despite Theresa May's welcome initiatives, investors need to look for good governance in the round.
Much will be entrenched in a company's policies, as well as in the dynamics of the board and its personalities. But such assessment is altogether messier than just counting the zeros in pay packets.