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Post-Brexit Britain and the pay culture: challenges and opportunities
Dr Demetra Arsalidou and Dr Alison Lui
The controversy over executive pay has been around for some time. For years, we have also been told that poor remuneration designs have damaging effects; they lead to unfair transfers of value from companies, their shareholders and other stakeholders to executives, affecting companies’ long- term sustainability. Precisely for this reason, the European Commission has adopted a number of critical measures over the past few years, which have proven popular on a continent struggling to emerge from the ruins of the 2007 financial crisis. There is now a firm framework in Europe regulating executive pay. There is ‘clawback’ through the return of money already paid to employees under certain conditions. There is also a ‘bonus cap’ through the capping of the bonus payments of senior staff in financial institutions. Finally, there is ‘remuneration disclosure’, which concerns the level of disclosure required by shareholders regarding details of directors’ remuneration and the extent to which shareholder approval is needed.
But against the backdrop of Brexit, there is great uncertainty about the future of these measures within the UK. This is because the current UK Remuneration Codes derive much of their present form from European legislative packages and regulations (particularly the Capital Requirements Directive IV). In our recent article in the Northern Ireland Legal Quarterly, we argue that legally, Brexit will have little impact on any of the three areas. UK legislation has already incorporated a great deal of EU legislation. The status quo of retaining such legal restrictions seems sensible in light of public sentiment towards unfairness in executive compensation and uncertainty towards the Brexit negotiations. Nevertheless, London faces stiff competition from other major international financial centres such as Frankfurt and Paris in a post-Brexit era. The loss of single passporting rights is also encouraging major banks to invest in other European financial centres.
Take the bonus cap, for example: adopted in 2014, the cap limits bonuses to 100 per cent of salary, or 200 per cent with shareholder approval. This is a direct result of the strong public frustration that had grown across Europe over excessive pay awards; , many endlessly argued that excessive bonuses boost excessive risk-taking and short-sighted behaviour. They encourage executives to care very little about the long-term effects on their institutions. The thinking is that the bonus cap will suppress these undesirable behavioural traits, motivating executives to think carefully about the long-term future of their institutions.
Yet, the UK government has never really supported this measure, attempting instead to oppose its implementation from the very beginning. At the time of its formulation, a number of arguments were raised by the government such as that it would be relatively easy to find ways around the restrictions, and that in limiting bonuses banks would either raise salaries or come up with alternative ways to pay their executives. Perhaps so. But that there was strong opposition and scepticism towards this policy by the UK government is hardly surprising. The UK hosts Europe’s biggest financial services centre. London’s role as the world’s largest banking hub is under threat if draconian measures such as this become part of its make-up. The bonus restrictions could, in the long run, cost jobs in the City, pushing financial institutions to establish themselves in more favourable countries.
Brexit, however, creates opportunities too. With the integration of digital technology, it is possible to create convenient platforms where investors can access reports on executive remuneration. A mobile AGM app has been created to allow shareholders to vote online. The app directly integrates with the AGM software, which contains information of a physical AGM, such as attendance, voting and presentations. Through the app, shareholders can ask questions and vote on resolutions. Evidence from Jimmy Choo’s online AGM reveals that shareholder engagement was better via the mobile app in 2016 than at the physical AGM in 2015.
Britain needs to compete with other important financial centres globally in a post-Brexit era. Competition is fierce and talent has become more important. Incentives are required to attract talent to London’s financial sector. High executive pay is justified as the scalability of CEOs is different to that of the average employee. Most shareholders accept the level of executive pay, contrasted with the public’s anger towards unfairness in compensation and distrust of big companies. Sensitivity of executive compensation and company performance is heightened with advisory say-on-pay votes. Continuation of this should be pursued as it should encourage shareholders to engage more with companies, scrutinising CEOs’ actions and decisions, leading to better corporate governance. Disclosure of directors’ remuneration is required to provide more voice to shareholders. An opportunity arises with digital technology such as mobile apps. They may create better access to such information and personalised services.
European legislation in corporate governance has addressed the issue of executive remuneration. Britain now has the choice to retain the status quo, or repeal part or all of the law on executive remuneration. In practice, much depends on political will and market forces. Businesses are increasingly frustrated by the lack of progress on the Brexit negotiations. It is very much hoped that politicians can reach an agreement soon. Until then, the UK economy hangs in the balance.