Are CEOs really paid too much?

Merry Fat Cat Thursday: your boss just earned more in three days than you'll get all year.

by Arun Kakar
Last Updated: 04 Jan 2018

In case you missed it, today is Fat Cat Thursday. Coined by the CIPD and independent think tank The High Pay Institute, it marks the point when the year-to-date pay of UK’s top bosses passes the median gross annual salary (£28,758) of UK workers. It only took three working days.

The ratio of FTSE 100 CEO pay to the average worker sits at a tidy 120:1, based on 2016 figures. This comes despite the mean pay packet of FTSE 100 CEOs slipping by a fifth to £4.5m, and median pay in 2016 falling to £3.45m from £3.97m in 2015 (as a benchmark, the list’s leader, Sir Martin Sorrell took home £48m).

Nonetheless, high pay has garnered more column inches than usual over the last six months, as inflation started to pinch wages and more stories of gross excess have been disclosed. In 2017, we’ve seen vice-chancellors, NHS super-doctors, rail bosses and, erm, Neymar raise questions about the gross excess of pay packets.

The central question remains, however - are CEOs paid too much?

The case against

No one really expects CEOs to earn the minimum wage - of course they’re going to be well-paid. But how much is too much? Thirty years ago, the ratio stood at about 40:1, meaning the pay gap has tripled.

The High Pay Institute has argued that this disconnects the CEO from the rest of their company, which can have a detrimental effect on workforce morale. In a 2015 survey of 1,000 working adults, the CIPD found that 71% of respondents agreed that CEO pay levels in the UK are generally too high and 60% agreed that it demotivates employees.

Mostly, though, the argument against super-high CEO pay is about injustice, made all the more real by the recent drop in real wages, which the TUC for one expects to continue this year.

‘Worker’s are suffering the longest pay squeeze since Napoleonic times,’ said Frances O’Grady, Director General of the TUC.’But fat cat bosses are still getting salaries that look like telephone numbers. The government needs a plan to make the economy fair again.’

The case for

Free market think tank The Adam Smith Institute has been one of the most vocal defenders of CEO pay, arguing that the role of the CEO has never been more important. To back this up, it points to examples such as Apple losing 5% of its value when Steve Jobs died, or Microsoft gaining 8% when Steve Ballmer resigned.

The gist is that CEOs are worth their pay packages - and implicitly that reducing pay would hit performance, ultimately making everyone worse off.

This all gets into the tricky issue of performance-related pay. Take Dame Glynis Breakwell, whose £468,000 pay packet caused a media frenzy that led to her retirement as Vice-chancellor of Bath University. She did a good job, by all accounts. The Sunday Times found that under Breakwell’s stewardship, Bath University became a world-class centre for science and engineering, never falling below 12th in their rankings.

The CEOs MT meets like to assign their companies’ successes to team effort, but the buck does stop with them, which means they have a hugely disproportionate effect on their firms’ fortunes. Few would deny the impact a brilliant, visionary leader (or for that matter a deluded tyrant…) can have on a business. What’s a million or two compared to that?

‘If shareholders are really missing a trick and overpaying their chief executives, who loses out? Well, shareholders, in the form of lower profits. And they’re the ones who stand to gain if they can fix that problem,’ wrote Sam Bowman of the Adam Smith institute in 2016. ‘There must be an opportunity for a firm to realise that CEOs are being overpaid, to buck the trend, and presumably to prosper. Why hasn’t that happened yet?’

What’s actually happening

The government backtracked on measures announced in last year’s manifesto to make executive pay subject to an annual vote by shareholders, instead introducing measures that would see companies facing shareholder revolt placed on a register overseen by the Investment Association. This was largely seen as a climbdown from Theresa May’s stated aim to tackle ‘the unacceptable face of capitalism’, caused by excessive pay.

However, there is still reason to be optimistic for The High Pay Centre and CIPD, who want to see high pay addressed as part of a broader review of UK corporate governance. One of key ways they claim this can happen is through workplace transparency, which the government is acting on.

Later this year, 9,000 listed companies will be forced to publish and justify pay ratios between their CEOs and average workers.

‘The drop in pay in the last year is welcome, and will have largely been driven by the growing public and shareholder concerns and the Prime Minister’s stronger focus on boardroom excess and plans to reform corporate governance,’ said Peter Cheese, CEO of the CIPD.

‘To ensure this year’s fall in CEO remuneration isn’t just a blip on the consistently upward trend of recent years, it’s crucial that the Government keeps high pay and corporate governance reform high on its agenda.’

For the CIPD, the ideal outcome would be remuneration that’s based on evidence and aligned to outcomes, financial and otherwise, while taking into account general levels of employee pay.

Whether this will happen because of a crop of newspaper headlines recurring every January remains to be seen. Boards will know that restraining CEO pay comes with a risk that their top people will walk. To act, they’d need to believe the financial hit from reputational pressures justifies that risk. In the absence of more direct intervention, don’t hold your breath.

Image Credit: January/Wikimedia Commons

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