It’s New Year and one of the first governance issues to emerge is executive pay. Think tank the High Pay Centre and the CIPD, a professional body for HR specialists, calculate that the “typical” FTSE 100 chief executive will earn the average annual income just before 5pm today.
The centre’s high pay counter is an annual fixture on the governance agenda and is used to draw attention to excessive executive pay levels and more broadly highlight its concerns its about inequality in the UK.
In 2018 (the latest figures available), the average FTSE 100 CEO earned £3.46m compared with the annual average (median) pay level of a full-time worker of £29,559.
The average hourly rate of a chief executives, says the High Pay Centre, is £903.30, while the average worker ticks up £14.37 per hour.
A typical FTSE 100 chief executive needed just 33 hours of work in 2020 to bag the average worker’s annual pay.
While those figures may be startling, the High Pay Centre indicates there may be some reason to think things are changing. Average CEO annual pay is down from £3.9m the previous year, and it now takes slightly longer to earn the average worker’s salary—until tea time instead of lunch time on day three of the year.
That’s possibly testament to the constant pressure maintained by campaign groups and investors alike. There is also an unrelenting media spotlight to contend with and a general change in business culture is under way; if companies wish to parade their new found concern for “stakeholder” value instead of “shareholder” value, it becomes a little harder to justify eye watering pay levels for top executives.
Fresh focus on pay
According to the High Pay Centre 2020 will be a big year for pay: this year will see companies with more than 250 employees report for the first time on pay ratio between CEOs and their average workers. The Companies Act also demands UK companies provide a “narrative” to explain the reasons behind their pay ratios.
That will bring a fresh of focus on pay as companies reveal their ratios and feel their way through the justifications. Press and campaigners alike are certain to draw attention to the numbers as they emerge.
The High Pay Centre sees a higher purpose to the project. “If we want to raise incomes for low and middle earners, measures that will enable them to get a fairer, more proportionate share of the spend on pay distributed by big companies will be of critical importance,” it said in a report.
Deferred shares
The end of last year provided more ammunition as attention shifted to the value of chief executive pension payments. Lloyds, Standard Chartered and Barclays announced cuts to their CEO pension pay while Kier Group, a construction company, saw an investor revolt against CEO bonus levels.
In October a report from another research institute, The Purposeful Company, reported that a “deferred shares” model of incentives was growing in favour over long-term incentive plans (LTIPs). According to the Purposeful Company, deferred shares may be appropriate for around a quarter or more of companies, instead of the current 5%. The report said deferred shares are not appropriate for all companies but are a “valid option” that should be available.
“Attitudes are shifting on how best to align CEO pay to performance. Companies and investors increasingly see deferred shares as a valid alternative to LTIPs to support long-term value creation,” the report said.
In November, the Investment Association—a professional body for fund managers—called on companies to implement “simpler executive pay policies” in recognition that LTIPs were not delivering.
At the time Andrew Ninian, director of stewardship and corporate governance at the Investment Association, echoed views that 2020 would be a significant moment for executive remuneration and “investors will be looking for signs that companies continue to listen to key concerns and ensure the pay structures of their top team align with company performance”.
