Executive pay: Fair or unfair, scrutiny will only increase

There are complex reasons behind CEOs' enormous remuneration packages.

by Stephen Jones
Last Updated: 06 Jan 2020

It’s the third work day of the month and by 5pm the average FTSE 100 CEO will have earned the equivalent of the average UK employee’s annual wage. 

As the yearly denouncements of greedy "fat cat" bosses ring out, it’s easy to see why chief executives might feel like scapegoats. After all, many would say (off the record, naturally) that there’s a good reason they earn so much more than the average employee - the responsibilities of running one of the country’s biggest firms are onerous, and the market for top executives highly competitive.

They’ve spent their entire career reaching their position, some at the cost of their private lives, and may feel they deserve the riches that come with it - a package that has been decided by a supposedly independent remuneration committee.

There is nothing wrong with that view. But in the furore and name-calling that comes with the debate, it’s easy to forget a major reason why executive pay has become such a big issue: the need for greater accountability at executive level. 

Carillion and Persimmon are often-used and rather extreme examples of what goes wrong when, in the first case executives’ interests become so misaligned with that of the wider company; and in the second case when an established remuneration plan heavily rewards a CEO despite the company’s poor performance.

In both cases, pay was a significant issue, but the problems arose from wider failings in the corporate structure. Capping CEO pay alone won’t help make boardrooms more accountable. 

Be that as it may, there is a moral question of whether it is right that a privileged few at the top of a business should get paid nearly double per week what many people earn in a year, and whatever their personal sentiments, executives will have no choice but to get used to greater scrutiny over the next year.

Executive pay ratio reporting came into force on January 1. Like gender pay reporting, public firms with over 250 employees now have to disclose how the chief exec’s wage compares to the upper and lower quartile pay of the rest of their employees. 

Companies have to explain how executives balance the wider interests of stakeholders when setting remuneration plans in annual reports and justify any potential increases in the gap. 

Pension plans are also under increasing scrutiny. The Investment Association has promised to "red-top" (strongly warn)  companies that introduce executive pension plans which are out of line with the wider workforce, unless they have a credible plan on how they will reduce the gap within two years. 

The idea is that greater transparency will boost trust among employees and the general public. The reality may be more nuanced, but evidence suggests that if staff feel closer to the CEO and more appreciated then they will perform better.

For those hoping to see the pay gap close, marginal progress has been made. At £901.30, executives were paid £119 less per hour in 2018 than the year before. 

Of course, not all forces are pushing in a downwards direction. The argument that caused spiralling executive pay in the first place, in the form of share options and later long-term incentive plans (LTIPs), is still widely accepted - giving executives more skin in the game aligns them with shareholders, theoretically improving performance and increasing accountability. 

The FT reports that some shareholder groups, including Schroders, Aviva Investors and Allianz Global Investors have called for executives to personally invest in more of their company’s shares, rather than just receive stock as part of their pay packet.

Indeed, studies have shown that if bosses have to buy shares out of their own pocket, rather than being ‘gifted’ them, their company is likely to perform better quarter to quarter - at least from a purely financial perspective.

Image credit: Daniel Sambraus via Getty Images

 

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