The former CEO of the Investment Association, the trade body that represents UK investment managers, has made a disruptive proposal on CEO pay.

Decades of technocratic effort by corporate governance experts have had unintended consequences. Pay levels have gone through the stratosphere with ever more complex arrangements. 

Daniel Godfrey’s idea is simple and radical: a salary-only model, incorporating shares. It would:

Align incentives with sustainable, long-term wealth creation, reversing the short-termism of the current model. The focus would be on the value of shares in seven years’ time, the earliest they can be sold, thereby concentrating the attention of CEOs on customers, environment, communities and suppliers – not to mention research and development as well as innovation;

Focus the current CEO on their successor’s success. Today’s CEOs have an incentive to pump up the stock value and leave their successor with the consequences;

Put responsibility for performance management back on to boards rather than pay formulae negotiated between remuneration consultants and investors. Shareholders would say to boards: “We trust you to work out how much it is worth to the company to get the right person, to identify someone who fits the bill and to calculate how much they need to pay to get and keep them.”

Today few CEOs know how much they will get in total because the formulae are so complex. Over time, a salary-only system removes uncertainty and provides the basis for a reduction in absolute levels of pay and inequality, too.

In return, boards would explain their thinking to shareholders. They would no longer be able to say: “If the CEO doesn’t perform, he won’t get paid.” Not only is this a low trust way to start a relationship, but “they don’t get paid” often does not happen.

The above would, together, hugely improve corporate and investor reputation. So what are the push backs?

Performance, remuneration and corporate governance specialists would need to do a different job. Their skills are needed but should be re-oriented to fully support long-horizon corporate success by actively monitoring factors such as return on capital over five year, innovation and future value. Fiddling with share-price-focused pay formulae simply has not worked.

Of course, bad CEOs may sometimes get more than they deserve. Shareholders need to accept recruitment mistakes happen. However, repeated errors would be a cause for resignations from the nomination committee responsible for finalising senior appointments and for these directors known for having poor judgement. This would quickly improve performance.

Others say this a great idea but how can we get from the dysfunctional system that we have today to this elegantly clean system? 

Why, for example, should CEOs agree while the City – including investment bankers and fund managers – have the potential to earn much more for seemingly doing much less? There are more fund managers at BlackRock earning over £10m (€11.5m) a year than there are CEOs of FTSE 100 companies. CEOs would, it is argued, simply move to escape this restriction. 

In fact the likelihood of these CEOs getting jobs in the US is slim and there are plenty of better-suited candidates from outside the UK to take their place. 

As with any deep culture change the solution will not come from technocrats and insiders. Nor can there be a complete solution one country at a time even though any country can trigger change for the good, or for the bad as we see in the US. Fundamentally this proposal depends on non-insiders making it happen.

It would be great if Godfrey’s proposal triggers investors to act but I do not expect them to change without additional pressure. That is why I am backing this innovative proposal.

Dr Raj Thamotheram is CEO of Preventable Surprises and a visiting fellow at the Smith School, Oxford University