Saturday, February 04, 2012

UK Prime Minister Rejects Idea of Employee Seat on Company Compensation Committee

UK Prime Minister David Cameron has rejected a Labor Party proposal that an ordinary employee sit on a company board compensation committee, noting that having an employee on the committee would break an important principle of not having people on a remuneration committee who will have their own pay determined. The Prime Minister also endorsed performance-based pay, such as bonuses. He said that there are people working in offices and factories who want performance-related pay and who, if they meet some targets, would like to have a bonus at the end of the year. The Prime Minister described this as pro-aspiration and pro-doing the right thing for your family. Labor Party Leader Edward Milliband has stated that having an ordinary employee on a company’s remuneration committee would bring transparency to the process and a dose of realism to decisions on executive compensation. The colloquy with Mr. Milliband took place during a House of Commons question and answer period on Feb. 1, 2012.

In recent remarks to the Social Market Foundation, Mr. Milliband called for a revolution in transparency about executive compensation so that company shareholders and others can come to a view about what is justified. As part of transparency, a change is needed on who makes the decisions about pay. In this regard, the Labor Party Leader said that an employee should sit on the remuneration committee of every major company. In his view, this simple reform would help forge a new compact between workers and employers and build trust that salaries at the top are deserved and that long term decisions are being made.

On the broader topic of combating short-termism, Mr. Milliband urged a tripartite approach to examine why institutional investors seem to be managed as if the only important issue was the next quarterly announcement, whether shareholder voting rights should always be the same from day one of ownership, and how the tax system can encourage and discourage short-term behavior.