Do curbs on CEO pay matter to the rest of us?
published by Guests, on 20/04/2017
By Simon Richardson (Westminster Business School)
The total annual pay package of the top FTSE 100 CEOs has quadrupled from an average of approximately £1m in 1998 to well over £4m in 2015, while average UK employee earnings in the same timeframe have only increased by 50 per cent, from £18,000 to £28,000 in 2016.
In other words, the top 100 UK CEOs have been awarded pay rises eight times higher than the staff they manage. The multiple that is most often quoted is that FTSE 100 CEOs are now paid 140 times more than the average UK employee, compared to a ‘mere’ 48 times more back in 1998. Are these 100 top employees so skilled that their contribution is worth a pay increase eight times greater than that of their staff? This raises the question of whether CEOs awarded these pay rises to themselves indirectly since they ultimately make these decisions, while their shareholders have been unable or unwilling to halt the tidal wave of bumper payouts. Would companies perform more productively if pay increases were spread equally throughout employees that might help fund, for example, the voluntary living wage?
Clearly the government has been sufficiently concerned about this issue to put further restraint on the publicly perceived ‘CEO gravy train’. Primarily, the consultation aims to strengthen measures already introduced in 2013, including rules that empowered shareholders of quoted companies on the UK Stock Exchange to provide ‘binding’ approval of executive pay policy every three years. This approach sounds plausible but, as HR practitioners know, a policy is often a guideline rather than a rule; to what extent would shareholders know enough about executive compensation to spot flaws in a long-term share scheme? Rumours that British multinational WPP CEO Martin Sorrell’s £74m share payout was the result of an unintended roll up on a five-year ‘leap’ scheme, which was then cancelled, only adds to the argument that there is limited transparency on executive pay. The result? A smokescreen of legitimacy appears to cover the income of a select few.
The lack of teeth in the 2013 government rules was reflected in recent shareholder ‘protest’ votes, where companies such as British housebuilder Crest Nicholson continue with CEO payouts on watered-down bonus targets. The new rule proposed by the government to curb executive pay would provide shareholders of a listed company with the annual power of veto (rather than the current advisory vote), which could overturn a Crest Nicholson-type decision. Shareholders or a designated non-executive director also need empowerment not only to represent employees, but also to review executive pay policy more often to reduce risks of creating unintended excessive share and bonus payments, which have to be curtailed last minute in annual general meetings.
But what is the HR perspective on all this? First, should a CEO be subject to similar performance management systems as their staff? Do current standard metrics of CEO performance, based on share price, exaggerate the influence that an organisation’s figurehead has on the results of the business? And why do UK businesses have such a high proportion of share equity (being a third of the CEO pay)11 compared to other countries? Perhaps HR has a role to bring the scrutiny of the CEO down to basics again with transparent SMART (specific, measurable, agreed upon, realistic, time-based) objectives and critical incident techniques to identify the key CEO interventions that add value to an organisation.
Could this scrutiny of CEOs’ behaviour be a little simpler for the public to gauge than private equity ratios, which only a City analyst would understand? New rules on executive pay will only apply initially to FTSE 100 CEOs but, if successful, they are likely to extend to all quoted companies and even to large organisations in the private sector. It’s possible that this wider review of executive pay will provide a welcome contribution to fund increases in the mandatory national living wage without reducing existing employee benefits and a wider uptake of the voluntary living wage. Perhaps we will finally see well-publicised high-pay and low-pay ratios reduced from both ends of the pay spectrum.