Fat Cat Friday: Gap grows as Governance Code kicks in

Just two and half days into 2019, FTSE100 CEOs will have already earned the average full-time worker’s annual gross pay. CEOs’ pay also rose 11% according to annual analysis by the CIPD and High Pay Centre.

Image of four figures and one standing apart on pile of coins
The CIPD and High Pay Centre’s research, launched today, RemCo reform: Governing successful organisations that benefit everyone, highlights the continuing rise of executive pay as revisions to the Corporate Governance Code come into effect and create what the independent bodies call a "burning platform" for action. Effective from 1 January 2019, the updated Code places an increased emphasis on company purpose and values as drivers of corporate governance, requires all large companies to report on how directors take employee and other stakeholder interests into account, and gives the UK’s largest publicly listed companies the deadline of 1 January 2020 to publish the ratios between CEO and the average worker. 

Good Work and pay

This latest analysis of UK FTSE CEO pay comes at a time when Good Work is rising up the political agenda. Excessive pay and the business culture of superstar CEOs is increasingly recognised as a failure of corporate governance, affecting employee engagement and trust in business leadership.Two years’ ago, Prime Minister Theresa May pledged to tackle the “burning injustices”, vowing to build a “shared society” with the government acting to correct imbalances and ensure fairness. Business Secretary Greg Clark unveiled in December a package of measures informed by Matthew Taylor’s Modern Working Practices Review. Supporting the Modern Industrial Strategy, it aims to “build a labour market that continues to reward people for hard work, that celebrates good employers and is boosting productivity and earning potential across the UK.”Yet commenting on the latest figures, Peter Cheese, chief executive of the CIPD, said: “There is still far too great a gap between top earners and the rest of the workforce. Average pay has stagnated whilst top CEO reward has grown, despite overall slow economic growth and very variable business performance.“Excessive pay packages awarded by remuneration committees represent a significant failure in corporate governance and perpetuate the idea of a ‘superstar’ business leader when business is a collective endeavour and reward should be shared more fairly. This imbalance does nothing to help heal the many social and economic divides facing the country.”

Key statistics on executive pay

As well as finding that the average FTSE 100 CEO is paid £1,020 per hour and £3.926 million a year – an increase of 11% on the previous year – research from the independent think-tank the High Pay Centre and the CIPD, the professional body for HR and people development, found:
  • the myth of ‘super talent’ continues to drive excessive pay, with one remuneration committee chair commenting “It’s nuts… and nuts has become the benchmark”
  • there needs to be much greater diversity among those responsible for setting CEO pay, both in terms of their ethnicity and gender, for example, but also their professional backgrounds and expertise to combat group think
  • current pay mechanisms contribute to the problem of high pay.
The CIPD and High Pay Centre are calling for remuneration committees to ensure that CEO pay is aligned more appropriately to rewards across the wider workforce, and that their contribution is measured on both financial and non-financial measures of performance. This should include measures such as employee well-being and investment in workforce training and development – all of which are crucial for good corporate governance.The CIPD and High Pay Centre also recommend replacing long-term incentive plans (LTIPs) as the default model for executive remuneration with a less complex system based on a basic salary and a much smaller restricted share award. They believe this would simplify the process of setting executive pay and ensure that pay is more closely aligned to executive performance. Simplification of executive pay could also allow more time for the committees to focus on other issues that are critical to wider corporate governance and also interact with pay and reward, such as corporate culture, good people management and sustainable performance driven by positive purpose.

Remuneration committees rebooted?

To reflect this wider remit, the CIPD and High Pay Centre suggest both refocusing and renaming remuneration committees so they become People and Culture Committees (PACCs).The refocused and potentially renamed RemCo would act as a champion for the importance of culture at board level, a key issue highlighted in revisions to the UK Corporate Governance Code. Some of the key responsibilities that the CIPD and High Pay Centre recommend for the PACC include:
  • Evaluating the impact of the company’s reward practices throughout the organisation, ensuring that sustainable performance, including societal and environmental impact, are included as key considerations in deciding remuneration and award. For example, by examining whether pay and benefits are aligned with the company’s purpose; whether they incentivise appropriate behaviours and performance; and whether differences in pay and reward levels from top to bottom are fair and proportionate.
  • Responsibility for setting, monitoring and reviewing remuneration and compensation payments for executive directors, chairman and board members, as well as overseeing succession planning and the development of long-term executive capability within the organisation.
  • Drawing on reliable and up-to-date information from HR teams about workforce demographics and changes, people management practices and organisational culture in order to ensure that company culture and the well-being of the workforce are consistent with the long-term strategy and purpose.
  • Setting out strategic objectives in relation to organisational culture and people management, designed to ensure the long-term success and sustainability of the company as well as ensuring that the long-term well-being and development of the workforce and organisation forms an integral part of business strategy.

Restoring trust at work

“Stakeholders of all kinds, including many shareholders, are looking for significant shifts in corporate cultures and behaviours,” said Peter Cheese. “Evolving the RemCo to become a broader people and culture committee would help boards focus on and gain deeper understanding of the organisational, cultural, and people aspects of their business, and the opportunities and risks they pose.“By better reflecting the value, contribution, diversity and well-being of our workforces in corporate governance and reporting, we can help restore trust in business and drive better business outcomes for everyone.”Luke Hildyard, director of the High Pay Centre, said: “Excessive executive pay is a barrier to a fairer economy. Corporate boards are too willing to spend millions on top executives without any real justification, while the wider workforce is treated as a cost to be minimised.“To raise living standards, we need growth and innovation, but also to ensure that growth is fairly distributed. CEO pay packages 133 times the size of the average UK worker suggest we could do a lot better in this respect.”Head to our HR section for more news and insight.  
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