Restraining directors' pay


The government’s consultation on ‘fat cat’ pay is missing the point, according to the Association of Chartered Certified Accountants (ACCA).

In its response to the government’s consultation document, “Rewards for Failure” The ACCA says that the real problem is a lack of an effective restraint mechanism for directors' pay.

A solution to the issue of rewards for failure will not be found in legislation, but through better initial disclosure of contract terms, it argues, together with greater emphasis on empowering smaller shareholders and boosting ethical awareness of directors themselves.

Echoing the recommendations made in the Higgs Report, the ACCA also says that remuneration committees should be more representative of society. Individual shareholders must also be able to be more effectively involved in decisions over pay and that remuneration disclosures must be made on a timely and fully transparent basis.

"Concerns over ‘fat cat pay’ are part of the current lack of trust in capital markets” said Paul Moxey, ACCA's Head of Corporate Governance. “Solutions are needed which include measures to ensure ethical awareness and greater transparency - issues which, unfortunately, the Financial Reporting Council (FRC) failed to make explicit in its new Combined Code on Corporate Governance.

“Board members themselves must start displaying more sensitivity to the relative balance of their pay and others in their company,” he continued. “CEOs in the top 100 UK companies are typically paid 80 times as much as the average worker.

"The stated purpose of this consultation is too narrow. It only seeks views on whether compensation reflects performance at the point when directors’ contracts are terminated. But ‘rewards for failure’ potentially arise at the time they come into employment.

“The problem should be considered as part of the wider subject of directors’ remuneration. If directors’ original terms and conditions are seen to be fair and reasonable then problem issues on termination should be dealt with transparently and, hopefully, to the satisfaction of all concerned."