Economists predict that it will take until 2028 for living standards to return to their 2008 levels. A primary concern among voters is the challenge of the rising cost of living. In light of these factors, it takes courage for a chair, CEO, or journalist to advocate increasing UK CEO pay to match that of CEOs in the United States. For those willing to explore this topic, here are some considerations to ponder:
Business is a force for good and the prime source of solutions to many of the world’s greatest challenges: climate change, health, poverty, hunger and technology. Outstanding leadership is a vital necessity to create and develop these successful businesses.
Businesses must attract and retain top talent and offer competitive pay to thrive. However, this doesn’t necessarily entail matching USA compensation levels for the 5.6m companies in the UK, given the distinct differences between the two countries. Nonetheless, the US boasts a great business environment and is often seen as an economic success story.
I lived and worked in the USA for four years. It is a great place to do business and to bring up a young family. It is a thriving capitalist society (for some). It also has some of the greatest wealth inequality of any developed nation. Its compensation system is very different to the UK, especially when it comes to pensions, health care and university fees. Direct comparison of base salary alone does not provide an effective benchmark.
Notable exceptions
There may be a small subset of companies where the argument for including US pay in CEO compensation criteria is compelling. These could include companies with significant sales and investments in the US, or those with a global market presence requiring global CEO sourcing, particularly in industries such as pharmaceuticals, science and technology. However, this should not be an automatic consideration for all companies.
The arguments in support of substantially higher CEO pay in the UK often lack merit. What truly drives economic growth in the UK is private sector investment, which is influenced by factors such as political stability, infrastructure investment, adherence to the rule of law, a clear national vision, and consistent tax and industrial strategies.
As president of the CBI a few years ago, I chaired a committee of FTSE chairs, examining executive pay policy in the UK. We concluded that there is neither a need nor a justification for legislation or regulation to intervene in executive pay.
Over the past decade, there have been some notable instances where adhering to UK norms for FTSE CEO pay has been challenging, and candidates or incumbents have been lost to US companies. Conversely, there have been cases where UK-based CEOs received compensation akin to US levels, particularly when their contributions to shareholder value were undeniable. In these cases, there was widespread support for high levels of compensation and few, if any, adverse headlines.
Executive pay is a critical and strategic issue that demands careful consideration. While the challenge of aligning UK pay with that of the US has persisted for years, any steps in that direction must be mindful of the UK’s unique context.
There are 14.7m people in the UK living in poverty, including more than four million children, and many more face a genuine cost-of-living crisis. Any high-profile debate about the need for CEO pay to reach tens of millions of pounds risks portraying the business community as detached from societal concerns. Ultimately, shareholders and investors need to demonstrate sensitivity and conviction in their decisions.
Paul Drechsler CBE is the president of the Society of Chemical Industry and former CBI president.