Executive pay: Too much emphasis on shareholder value

Annual ‘High Pay Day’ figures published with warning to employers not to treat new CEO pay reporting requirements as a tick-box exercise.

FTSE 100 CEOs only need to work until just before 17.00 on Monday 6 January 2020 in order to make the same amount of money that the typical full-time employee does in the entire year. 

The calculation for ‘High Pay Day’ is based on data and analysis by the CIPD, the professional body for HR and people development, and independent think tank the High Pay Centre, showing that: 

  • Top bosses earn 117 times the annual pay of the average worker
  • In 2018 (latest available data) the average FTSE 100 CEO earned £3.46 million, equivalent to £901.30 an hour 
  • In comparison, the average (as defined by the median) full-time worker took home an annual salary of £29,559 in 2018, equivalent to £14.37 an hour
  • To match average worker pay in 2020, FTSE 100 CEOs starting work on Thursday 2 January 2020 only need to work until just before 17.00 on Monday 6 January – just three working days (33 hours)

High pay will be a key issue in 2020 as this is the first year that publicly listed firms with more than 250 UK employees must disclose the ratio between CEO pay and the pay of their average worker. Under changes to the Companies Act (2006), firms must now provide their CEO pay ratio figures and a supporting narrative to explain the reasons for their executive pay ratios. The first round of reporting will be seen in annual reports published in 2020.

However, the CIPD and High Pay Centre are calling on businesses not to treat the new reporting requirements on executive pay as a ‘tick-box’ exercise and to use it as an opportunity to fully explain CEO pay levels. They also highlight the need for firms to provide a clear rationale for why CEOs are paid what they are and what is being done to address the issue of fair pay in their organisation more broadly. 

The CIPD and High Pay Centre consider this an important step to help build trust in business amongst employees, wider stakeholders and society.

Peter Cheese, chief executive at the CIPD, said: 

“This is the first year where businesses are really being held to account on executive pay. Pay ratio reporting will rightly increase scrutiny on pay and reward practices, but reporting the numbers is just the start. We need businesses to step up and justify very high levels of pay for top executives, particularly in relation to how the rest of the workforce is being rewarded.

“Greater fairness and openness in pay is essential in building trust, amongst employees as well as external stakeholders and investors. Expectations on businesses behaving and acting responsibly are rising, and greater transparency around how they are treating and managing all their people is a vital part of building long-term sustainability.”

Luke Hildyard, director of the High Pay Centre, said: 

“How major employers distribute pay across different levels of the organisation plays an important role in determining living standards. CEOs are paid extraordinarily highly compared to the wider workforce, helping to make the UK one of the most unequal countries in Europe. New reporting requirements mean that publicly listed firms will have to be more transparent over how and why they reward their CEOs relative to the wider workforce. Hopefully this will lead to a more sensible balance between those at the top and everyone else.”

Ann Franke100x100Ann Francke, CEO of the Chartered Management Institute (CMI), reacting to High Pay Centre & CIPD executive pay findings:

“It is the responsibility of an organisation’s board to look at the impact of their actions on stakeholders - customers, suppliers, employees - not just shareholders. Executives need to be benchmarked and remunerated against how they deliver for all of these elements.

"Too much emphasis is placed on shareholder value, and in my view shares do not reflect the actual performance of the company. We need to find mechanisms to ensure that employees are engaged and valued - justifying executive pay gaps is key to this.

“CMI knows that, whilst greater transparency can create positive change, it must go hand-in-hand with strong, skilled leadership in order to maintain a confident, fair workforce”. 

CMI’s latest Manager’s Voice survey, conducted between 24th October and 5th December 2019, found that:

  • 77% of managers believe corporate pay reporting will hold big business to account for the salaries they pay
  • 59% believe corporate pay reporting will give employees greater confidence in the remuneration process
  • 53% believe corporate pay reporting will lead to fairer pay in the workplace generally

 

The CIPD and High Pay Centre warn that the ongoing issue of excessive high pay undermines trust in business and fuels concerns over fairness given that many workers have, for a prolonged period, struggled to see their pay keep pace with the cost of living. They have long been calling for large listed firms to report on pay ratios to address these concerns so are pleased to see that this is now a requirement and believe it is an important step towards ensuring companies are more transparent over their reward and people management practices.

The pay ratio regulations now make it a statutory requirement for UK listed companies with more than 250 employees to annually disclose the ratio of their CEO’s pay to the median, lower quartile and upper quartile pay of their UK employees. 

Importantly, they must also publish a narrative to explain:

  • the reasons for any year-to-year reductions or increases in the ratios
  • whether or not the company believes the median ratio is consistent with the organisation’s wider policies on employee pay, reward and progression
  • how they have calculated their ratio and why that method was chosen

To avoid the new requirements being treated as a mere compliance exercise, the CIPD and High Pay Centre are also emphasising the importance of firms complying fully with their wider reporting obligations under the UK Corporate Governance Code, including:  

  • Why executive director remuneration is appropriate relative to their organisation’s strategy and the long-term performance of the company
  • Why executive remuneration is appropriate using internal and external measures including pay ratios and pay gaps across the company’s workforce
  • What engagement has taken place with employees to explain how executive remuneration aligns with the pay of the wider workforce

When creating the narrative, and considering executive pay moving forward, the CIPD and High Pay Centre want businesses to question some of the assumptions that have contributed to excessively high pay. These include challenging the value of long-term incentives plans (LTIP’s), whether the CEO’s pay packet is delivering good value for money and whether remuneration committees are effectively overseeing fair pay up and down the workforce. 

The CIPD is the professional body for HR and people development. The not for profit organisation champions better work and working lives and has been setting the benchmark for excellence in people and organisation development for more than 100 years. It has a communitiy of more than 150,000 members across the world, provides thought leadership through independent research on the world of work, and offers professional training and accreditation for those working in HR and learning and development.

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