650% not enough: How much is?

This month has been a fascinating one already for UK pay, at the top and bottom of the earning scale. For the lower paid, bar the odd antediluvian moan on costs from UK Hospitality, there was remarkable political and stakeholder unanimity in the celebration of  the achievements of 25 years of the National  Minimum Wage. This was moved up by  almost 10% on Monday to reach the government’s target of two-thirds of average earnings.

Kate Nicholls at UKH warned that many hospitality ‘businesses will not even make it to deliver these wage increases and jobs will be lost’. But with continuing and extensive labour shortages in that and most sectors still, Christian Kaberg, managing director of the St Pancras Hotel Group, told the Financial Times that ‘the industry is experiencing staff shortages that are partly self-inflicted… As an industry and an employer, we need to start doing the right things — one of them is paying people properly’.

Executive pay: more, more, more

UK executives and their remuneration committees certainly seem to be following Kaberg’s advice at the other end of the UK income distribution. Yet another month and yet more obscenities and arguments over executive pay levels and structures in the UK.  What are the latest? Take your pick.

There’s Abrdn’s new finance director Jason Windsor’s base salary of £675,000, which is 25% above what his predecessor Stephanie Bruce received, a level opposed as being simply too high by influential investment adviser Glass Lewis.

Or the proposed new long-term incentive plan share award of almost £15million for Ocado CEO Tim Steiner, equivalent to 18 times his £824,570 base salary. That’s some incentive. Advisers ISS and Glass Lewis again are advising shareholders to reject the plan at their AGM later this month, as ‘excessive’ and ‘materially above market norms’.  Ocado shares have fallen by almost a quarter under his stewardship in the past year.

Yesterday two-thirds of AstraZeneca shareholders at their AGM voted to increase French chief executive Pascal Soriot’s LTIP maximum from 650% to £850%; and the annual bonus from 250% to 300% of his almost £1.5 million base salary. The Company cited the higher pay of US pharmaceutical heads at companies such as Eli Lily by way of justification. Soriot earned £16.9mn last year under the previous plans.

Someone on the new NLW rate working a full-time 35-hour week will earn £20,820 pa under the new rates adopted this week.

And Smith & Nephew shareholders will shortly be voting on a proposed pay rise for their US-based chief executive Deepak Nath, as part of their new executive pay policy, of 29% - up to a maximum of $11.79mn next year. Illustrative of the divisiveness of the issue, ISS recommended shareholders reject the plan at next month’s annual meeting, calling it “excessive”. Glass Lewis on the other hand recommended supporting the new remuneration policy, despite ‘reservations’, as the Company provided a  ‘compelling rationale’ for paying more to its US-based leaders.

40% of shareholders opposed their last policy uplift which saw US-national CEO Namal Nawana quitting after unsuccessfully demanding pay parity with his American competitors. The Company has had four CEOs in the last five years, leading chair Rupert Soames to argue strongly in favour of matching US rather than UK market rates.

The debate

The executive remuneration arguments have intensified since earlier last year when Julia Hoggett, CEO of the London Stock Exchange, recommended that investors should back higher CEO pay in order to discourage companies from moving their stock market listings overseas. Several companies with large North American operations, including gambling company Flutter and building materials firm CRH, have left the FTSE 100 for a listing in the US.  She said that the alternative ‘is we continue standing idly as our biggest exports become skills, talent, tax revenue and the companies that generate it’.

CEO pay rates are approximately two to three times the UK average in large, quoted companies in North America (£13.1 million according to the AFL-CIO), although the largest US firms tend to be bigger than their UK equivalents. But are large firms really going to leave the UK just because of the lower executive pay levels? As well-known journalist and management author Stefan Stern asked in a coruscating critique of our executive remuneration model last month: ‘the cries from Britain’s struggling CEO’s are growing louder – how can they survive on a mere £4.4 million?!’ (the average total remuneration for FTSE CEO’s last year according to the High Pay Centre).

The market-recruitment-and-retention arguments certainly appear to be weak for the bulk of large companies and their overwhelmingly white male CEOs. While 40% of FTSE 100 firms have a non-UK national as their CEO’s, despite performing relatively well from a diversity standpoint in terms of women and ethnic minority incumbents, fewer than 10% of US Fortune 500 companies CEOs are non-American nationals according to Qualtrics.

And if you look into Europe and other parts of the world rather than just the US, UK executive pay levels look fine, even high compared to some. Median pay for the companies listed on the pan-European Stoxx 600 index, which includes the biggest UK companies, was €3.5m (£2.9m) in 2022, according to research Vlerick Business School. Excluding UK firms, the European median pay was €3.1m

The broader arguments for the damaging social and economic impact of rising executive pay levels and resulting inequality have also become louder on both sides of the Atlantic, in this year of impending general and presidential elections. Should the UK really be following an executive pay model which has seen, for example, the disastrous reign of outgoing CEO Dave Calhoun at Boeing rewarded with $65 million in total earnings in his first three years, with a  final 45% pay uplift this year before he finishes at year-end?

In his State of the Union address earlier this year President Biden argued that it was time for ‘big business’ to ‘finally pay their fair share’, saying that if re-elected he was planning to ‘end the tax breaks for big pharma, big oil, private jets and massive executive pay’.

And 20 leading UK academics reflecting on Julia Hoggett’s comments warned the UK’s largest pension funds and investment houses last month that allowing US-style and -sized packages would ‘create a significant risk of higher inequality’ with ‘much lower levels of happiness, health and well-being across society’. In is new book ‘Enough’, the High Pay Centre’s Luke Hildyard documents the extensive international evidence on this, as well as pointing to the damaging impact on the pay and motivation of employees.

One US research study for example, found that employees ‘identify less strongly with a CEO who receives high pay relative to other CEOs’ which is counter-productive to the organisation and its performance.

The arguments aren’t helped by a whiff of self-interest in some of executive pay decisions, a serious shortfall given that the revised slimline UK Corporate Governance code’s principles essentially boil down to two: set executive pay wholly independently and link it to performance. Astra Zeneca’s shareholders were offered a 7% increase in dividend ahead of their vote yesterday, rising by $0.20 to $3.10 per share. Analyst Sophie Lund-Yates at Hargreaves Lansdown told Reuters that this was a ‘barely disguised sweetener… to get the divisive package through.’ Shareholder’s in Julia Hoggett’s London Stock Exchange Group will get to vote soon on a revised package for her boss, David Schwimmer, involving a proposed 76% pay rise to a more-US aligned £11 million. A different meaning to performance-related incentives perhaps…

So what’s the solution, where should HR leaders and independent Rem. Co. members position themselves in this highly divisive debate?

Action

Luke Hildyard argues in favour of tax and wealth redistribution from the highest to the lowest earners. Read his persuasive arguments in favour of this. While an incoming Labour government seem likely to focus initially on the lower end of the earning scale if they are elected later this year, such action undoubtedly would become more likely, as he optimistically forecasts and hopes.

But given that this would be above the pay grade responsibilities of most of us, what can we practically do? Based on my current experience with remuneration committees across a range of sectors, I would suggest three areas we can act in.

First, encourage as broad a perspective in your executive remuneration setting process as possible. Set terms of reference for your Rem Co, as the CIPD recommends, as broadly as possible; and certainly including the determination of reward strategy and policy for the wider workforce, as well as your executives. Hidden away in its provisions even the Corporate Governance Code recommends that Committees should ‘review workforce remuneration and related policies and the alignment of incentives and rewards with culture’.

The CIPD recommends it becomes  ‘a formal ‘people and culture’ committee’ in place of the remuneration committee, considering recruitment and talent management as well as broader reward management issues. And the Investment Association in its recent letter to FTSE 350 company Rem Co chairs in reviewing the 2023 AGM season ‘praises the efforts taken by committees in the recent inflationary environment, including the focus of salary budgets on lower-paid employees, as well as providing good disclosure of how all employees were treated’

Consult with all of your stakeholders regularly, and ideally have as many groups as possible represented on your committee. The best university Rem Co I work with in Higher Education has the head of the students union as a full member (who is incidentally understanding and supportive of their current Vice-Chancellor’s package).

Secondly, interpret ‘performance-related’ remuneration as broadly as possible. As the CIPD recommends, look well beyond just financial results and short-term performance to incorporate much wider ESG-style considerations. Focus on the genuinely long-term, reflecting the approach of companies such as Swedish bank Handelsbanken which invest performance-related payments in people’s pension pots to access when they retire. Consider moving away from traditional LTIPs towards longer-term stock-holding plans, as recommended by bodies such as the Purposeful Company and High Pay Centre.

Even more significantly ensure that all employees, not just executives, have the opportunity to progress their pay and share in the returns of high performance and success. I have written elsewhere of the well-researched benefits of employee profit sharing for example.

And finally where I do agree with the somewhat narrowly defined guidance and codes of bodies such as the Investment Association is to be genuinely principle and purpose-based, rather than rules and market-wagon-train-following, in your executive remuneration setting, tailoring policies to the character and needs of your organisation, its purpose and its people.

Enough!

‘In global Britain, we have low pay for the masses, flat productivity, widespread economic inactivity and low morale. And the CEO’s solution? Pay us more’.

When I started out in rewards consulting, boards used to largely ignore the internal pay ratios and comments on fair pay that I always included in my executive remuneration reports. Stefan Stern’s devastating conclusion should shame us all into thought and action. Every Rem Co and each of us individually needs to keep asking the question when we are considering the pay of the highest-paid executives and lowest-paid workers: how much is enough, what’s fair?