Corporate governance review must look beyond pay comparisons, warns PwC

Comparing the pay of directors and employees will do little to address concerns over executive pay unless disclosures are placed into context, PricewaterhouseCoopers (PwC) has warned.

Speaking at the CBI conference on 25 October, business secretary Vince Cable launched a review into UK corporate governance, which will include an investigation into executive pay.

Cable said that the review would investigate what was influencing short-term decisions, the reasons behind the growth in directors’ pay, and why economically damaging takeovers are still taking place.

“To quote [CBI director-general] Richard Lambert, if leaders of big companies seem to occupy a different galaxy from the rest of the community, they risk being treated as aliens,” he told the delegates.

“Chief executives’ total remuneration rose by 14% per year over the 10 years from 1999 to 2009 – even though there was a fall in the value of the FTSE-100 of 1% per year. Compare this with average earnings growth of 4%. So perhaps it is time to return to Earth.”

But Jon Terry, reward partner at PwC, said that while the professional services firm supports the review into corporate governance, simply comparing pay data would prove counterproductive.

“A similar measure recently introduced in the US has provoked widespread criticism,” he said. “Simple comparisons of wages are meaningless without information on the value different employees bring to the business.

“Most chief executives are rewarded relatively small amounts compared with the market capitalisation of their company,” he added. “Disclosure is important but the focus needs to be on explaining pay levels, rather than providing data alone.

TUC general secretary Brendan Barber praised the review as “bold” but warned that the Government needed to “take on vested interests in the corporate, legal and financial sectors if its proposals are to make a difference”.

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