Executive pay: why is it so high?

Companies that address accusations of corporate greed swiftly are the most likely to protect their reputations – and transparency is key.

There’s a digital counter on the homepage of independent think tank, the High Pay Centre. Second by second, it shows what the average FTSE 100 chief executive has earned since 1 January 2017. Eleven days into the year at 11.09am, the figure stood at £132,542.

It’s a level of pay way beyond the dreams of any ordinary employee. The publicity around Fat Cat Wednesday prompted howls of outrage in the national press – and having initiated a corporate governance review as she entered office, executive pay packets are clearly on prime minister Theresa May’s mind as well.

Add in Labour leader Jeremy Corbyn’s recent call for a pay cap to concerns about widening social inequality, and companies accused of boardroom pay excesses are likely to be feeling the heat.


Top executives in the UK have not always been paid at this level, explains Duncan Brown, head of HR consultancy at the Institute for Employment Studies. A FTSE chief executive at the start of the millennium might have been on 50 times average earnings, but by 2013 that multiple may well have risen to 150 times. This is due to complex remuneration deals involving share scheme options on top of a bonus, which could more than double the basic salary.

It’s likely that there will be more consumer campaigns against corporate greedMarcus Smith, Reputation Institute

The change in structure of top senior executives’ pay is due to a belief that gained currency in the mid 1980s, says professor Sandy Pepper of the London School of Economics. It was held that aligning the pay of those at the top with the interests of shareholders by offering long-term, share-based, performance-related incentives would ensure optimal performance.

However, a series of studies over the past 40 years has shown that it’s “highly debatable” that aligning top executive pay with shareholder interest has had anything like the desired transformational effect, he adds.

Drawing on five years of research showing that governance is the second strongest driver of corporate reputation, Marcus Smith, managing director at the Reputation Institute, observes that when public perception of pay turns toxic, the risk to corporate reputation is considerable.

In the face of widening inequality, the burgeoning sense of people power that was pinpointed in the Brexit vote and Trump victory is likely to shift across from the political world to the consumer world, he warns. “It’s likely that there will be more consumer campaigns against corporate greed and the perceived pay racket.” Companies that see these difficulties coming and engage swiftly are the most likely to protect themselves reputationally, he says.

The peer effect

Constructively addressing the issue of rocketing pay means looking at motivation, value and perceptions of equity – not just at boardroom level, but among employees and in society. It would be too simple and wrong to assume that all executives in the western world are greedy, says Mr Pepper. The issue, he suggests, is instead systemic; although boards might dearly wish to pay more moderately, they’re competing for the top echelon of senior managers and don’t feel that they can afford to bid low.

Everyone is looking over their shoulder to see what other people are gettingProfessor Pepper, London School of Economics

His research with more than 750 senior global executives on their personal pay preferences and motivations suggests that many would give up almost 30pc of income to work in more satisfying roles. They’re also far more risk-averse than expected. They respond better to immediate financial security, rather than the gamble of long-term reward schemes, and will work for far less (at a rate of 30pc of promised value per annum) when offered a giant cake in three years, rather than a reasonably-sized slice today.

Also, fairness matters – a lot. From interviews he conducted, Mr Pepper says: “When it comes to pay, absolute numbers, once you’re beyond what you reasonably need to live, cease to mean anything much.” Instead, he was told that it was relative pay, compared to others within a peer group, that was more critical. “Everyone is looking over their shoulder to see what other people are getting” he adds.

Where’s the line?

Given the bleak economic context in which many workers in the UK now toil, how do the very highest earners justify the sums they pocket?

“It’s impossible to set a benchmark for what the ideal boardroom salary should be; there are too many variables,” says Professor Vikas Shah, who has founded a number of successful businesses. While he believes that leaders should be rewarded for their work, he says that it’s vital that companies understand and justify senior employee pay packets.

The more upfront businesses are about how executives are being rewarded, the more positive the impactAmanda Fennell, Xactly

“There has to be qualitative and quantitative measurement of performance, not just in terms of profit and shareholder value but across the metrics of the enterprise, to better understand how the board is doing at delivering on the firm’s objectives,” he says.

Amanda Fennell, senior director at Xactly EMEA, which aims to transform the structuring of incentive compensation, says: “Although there may be some sensitivities in outlining company aims, the more upfront businesses can be about how executives are being rewarded, the more positive the impact on both workers’ morale and public perceptions.”

The immediate practical reality for remuneration committees seeking to implement change is, however, really tough, acknowledges Mr Brown. “You’re working in a situation where people don’t think the market is right, but are you going to stick your neck out [and risk losing the people whom you need?]”

Embracing a more open approach

The government’s emphasis appears to be on shareholders holding boardroom pay packets to account. But with even large investors owning perhaps no more than 5pc of stock, it makes no commercial sense for any one of them to bear the whole cost of regulating excessive pay. One proposal in the bundle of ideas recently suggested to government is that several large company investors form a committee that’s charged with collectively communicating its view on remuneration.


The companies that will be more resilient are those with strong records of transparencyDuncan Brown, Institute for Employment Studies

Rita Trehan, a former HR director who now advises companies worldwide on maintaining a healthy workplace culture, says that HR departments have a vital role to play. “They must be the independent voice in designing pay structures, incorporating a system of checks and balances, and spotting any unethical behaviour to mitigate risk.” This means pushing back when performance measures don’t stack up and understanding what the best market practice is, she adds.

Mr Brown points out that one corporate – John Lewis, which is run as a mutual – is not doing too shabbily despite paying its chief executive on a simple salary and profit share basis. “The same as the person on the Waitrose checkout – and there’s no bonus,” he notes.

John Lewis also has employees who are able to voice views on pay on its board. Taking the temperature across a company’s workforce can be a useful tool in promoting openness and accountability, suggests Mr Brown, and is an approach used in other European countries via work councils.

To protect their reputations in the future, companies will need to look hard at what they’re doing on pay, concludes Smith. “Those that will be more resilient are the ones that have good, strong and long records of transparency.”

(Source: http://www.telegraph.co.uk/connect/better-business/executive-pay-why-is-it-so-high/)


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