Chief executives get even richer

The median pay of chief executives of the FTSE 100 companies rose 11% in 2017 to £3.93 million per year, according to figures released by the High Pay Centre. By contrast, the median pay of full-time workers rose by just 2%. Given two huge pay increases for the CEOs of Persimmon and Melrose Industries of £47.1 million and £42.8 million respectively, the mean CEO pay rose even more – by 23%, from £4.58 million in 2016 to £5.66 million in 2017. This brings the ratio of the mean pay of FTSE 100 CEOs to that of their employees to 145:1. In 2000, the ratio was around 45:1.

These huge pay increases are despite criticisms from shareholders and the government over excessive boardroom pay awards and the desire for more transparency. In fact, under new legislation, companies with more than 250 employees must publish the ratio of the CEO’s total remuneration to the full-time equivalent pay of their UK employees on the 25th, 50th (median) and 75th percentiles. The annual figures will be for pay starting from the financial year beginning in 2019, which for most companies would mean the year from April 2019 to April 2020. Such a system has been introduced in the USA this year.

So why has the gap in pay widened so much? One reason is that there is no formal mechanism whereby workers can apply downward pressure on such awards. Although Theresa May, in her campaign to become Prime Minister in 2016, promised to put workers on company boards, the government has since abandoned the idea.

Executive pay is awarded by remuneration committees. Membership of such committees consists of independent non-executive directors, but their degree of independence has frequently been called into question and there has been much criticism of such committees being influenced by their highest paying competitors or peers. This has had the effect of ratcheting up executive pay.

Then there is the question of the non-salary element in executive pay. The incentive and bonus payments are often linked to the short-term performance of the company, as reflected in, for example, the company’s share price. In a period when share prices in general rise rapidly – as we have seen over the past two years – executive pay tends to rise rapidly too. A frequent criticism of large UK businesses is that they have been too short-termist. What is more, bonuses are often paid despite poor performance.

There has been some move in recent years to make incentive pay linked more to long-term performance, but this has still led to many CEOs getting large pay increases despite lack-lustre long-term performance.

Then there is the question of shareholders and their influence on executive pay. Despite protests by many smaller shareholders, a large proportion of shares are owned by investment funds and their managers are often only too happy to vote through large executive pay increases at shareholder meetings.

So, while the pressures for containing the rise in executive pay remain small, the pay gap is likely to continue to widen. This raises the whole question of a society becoming increasingly divided between the few at the top and a large number of people ‘just getting by’ – or not even that. Will this make society even more fractured and ill at ease with itself?

Articles

• Total FTSE 100 Chief Executive pay has increased by 11% in the past year

Chartered Institute of Personnel and Development, Press Release (15/8/18)

• Pay for Britain’s top bosses rises 23 percent

Reuters, Dasha Afanasieva (15/8/18)

• Top pay in UK up by 11% as workers’ wages fail to match inflation

The Guardian, Sean Farrell (15/8/18)

• The fat cats are back in business

The Guardian, Nils Pratley (15/8/18)

• No CEO should earn 1,000 times more than a regular employee

The Guardian, Sarah Anderson and Sam Pizzigati (18/3/18)

• Executive pay ratio regulations come before parliament

Personnel Today, Jo Faragher (11/6/18)

• Remuneration Committees: The New Challenges

Critical Eye (Jan 2011)

• How does a company’s CEO pay compare to its workers’? Now you can find out.

Vox, Emily Stewart (8/4/18)

• How to Track CEO-Worker Pay Ratios

Inequality.org, Brian Wakamo (2/4/18)

Information and data

• UK’s biggest firms will have to justify pay gap between bosses and their workers

Department for Business, Energy & Industrial Strategy, Press Release (10/6/18)

• Pay ratio tracker tool

Bloomberg, Alicia Ritcey and Jenn Zhao

• Corporate Governance Reform – CEO pay ratios

The Chartered Institute of Payroll Professionals (CIPP) (21/8/18)

• FAQs on executive pay ratio reporting

Xpert HR (14/8/18)

• Pay Tracker: Comparing Chief Executive Officer pay in the FTSE 100 with average pay and low pay in the UK

The Equality Trust (March 2017)

Questions