While 36 FTSE 100 companies have announced cuts to executive pay in response to  the  Covid-19  crisis and economic downturn,  this  doesn’t signal a sea change  for reining in executives' incentives, finds new research from the CIPD, the professional body for HR and people development and the High Pay Centre. Most of the 36 companies have  used  a combination of measures to cut pay, which the report suggests are mainly superficial  or short-term. The most common  measure, taken by 14 companies, has been to cut salaries at the top by 20%.  However,  salaries typically only make up a small part of a FTSE 100 CEO’s total pay package.  

Eleven companies have cancelled  Short-Term Incentive Plans (STIPs)  for  their CEOs  while two other firms have deferred salary increases for their CEOs.  None of the 36 companies have chosen to  reduce  their CEO’s  Long-Term Incentive Plan  (LTIP), which  typically  makes up  half  of  a  CEO’s total  pay  package.  

Executive pay 119 times more than median UK worker earnings

For the financial year ending 2019, the  report  finds that  FTSE 100 CEOs took home a median pay package worth £3.61m,  which is  119 times greater than the median  earnings  of a UK full-time worker (£30,353).  This is broadly the same as the  median FTSE 100 CEO  salary  for the financial year ending 2018  (£3.63m)  and  only  represents  a  0.5% decrease.   

Performance-related pay policies  also continue to pay out as a matter of course:  88 FTSE 100 companies paid  their  CEO  an  annual bonus  in 2019,  with total payments reaching  £108.48 million.  So-called  ‘Long Term Incentive  Plans’  (LTIPs)  paid out at 81 companies,  totalling £238.19m.  

The report argues that  when performance-related pay is almost guaranteed  –  as  appears to the be the case when  the overwhelming majority of  policies  pay out every year – its value as a reward or incentive is greatly weakened.  Huge incentive payments also risk  giving  individual executives  disproportionate  credit  for performance dependent on a much wider range of factors, such as the economic context or the contribution of the company’s  wider  workforce.  

A more holistic approach still needed to setting executive pay

The CIPD and High Pay Centre say the findings underscore the need for reform to  the remuneration committees that set executive pay.  Building on the  amended UK Corporate  Governance  Code  2018  they  want  decisions on  top  pay and  bonuses  to be  more fairly aligned with wider workforce pay,  and  to  incentivise  other areas critical to longer term sustainability. This includes  investment in training and improvements in company culture and diversity, as  well as customer  experience  and the  environment.    

Peter Cheese, Chief Executive of the CIPD, the professional body for HR and people development, said:   “It doesn’t look like  the  pandemic  has  proven  to be  an inflection point for executive pay  yet. The bulk of cuts made so far  appear to be short-term  and don’t signify meaningful, long-term  change.  Pay among the FTSE 100 will probably fall next year, but this  is  more  likely  to  be due to  wider economic circumstances  rather than  a  fundamental change in approach to executive pay.   

“We continue to find  a disconnect between the total reward packages of CEOs in the FTSE 100 and their actual contribution to long-term company performance. Too big a share of CEO payments depends on the fluctuating fortunes of the stock market and not  enough  on whether they are a responsible custodian of the business for all stakeholders, including, of course, the workers who drive long-term value.  

“As well as other  environmental and social  factors,  now  more than ever, RemCos  should be looking at wider workforce issues  and organisational cultures  to help them determine CEO pay.   Not only would this help incentivise CEOs to improve how their organisation invests and manages its workforce to support long-term performance, but it should make companies fairer and will help rebuild trust in business.”  

Executive pay mutliples a threat to solidarity?

Luke Hildyard, Director of the High Pay Centre think tank,  said:  “Very high CEO pay undermines the spirit of solidarity that many companies are trying to project as they battle against the impact of the coronavirus. More pragmatically, multi-million pound pay awards worth over a hundred times the salary of a typical worker seems  like an unnecessary extravagance during a period of such economic uncertainty.  

“If we want to protect as many jobs as possible and give the lower paid workers who have got the country through this crisis the pay rise they deserve, we will need to re-think the balance of pay between those at the top and everybody else.”  

Further findings from the  FTSE 100 CEO pay in 2019 and during the pandemic  report show:   

• The highest paid FTSE 100 CEO received a total pay package of £58.73 million. This is 1,935 times the median salary of a full-time UK worker  
• Six firms paid their CEOs more than £10 million in total  
• 70 companies disclosed the pay ratio between their CEO and the median pay of their UK employees. The highest quoted pay ratio was 2,605:1 and the lowest was 15:1. The median was 84:1  
• The median pension contribution (or equivalent) given to a CEO is £189,000, representing 24% of their median salary. In comparison, pension contributions for employees represents 7.2% of their  wages and  salaries 
• For the first time in the report’s four-year history, there are  now  more women FTSE 100 CEOs (seven)  than there are CEOs called  David/Dave (six),  Andrew/Andy/André  (six) or  John  (five).  However,  the  mean  pay  for  female CEOs  (£4.02 million)  is lower  than mean pay of male CEOs  (£4.74 million)   
• The under-representation of black CEOs in the FTSE 100 is even more stark than the gender imbalance. While the Corporate Governance Code does not require firms to report the ethnicity of their senior management teams, other sources suggest there are currently no black British CEOs in the FTSE 100.  

The CIPD and High Pay Centre also recommend that:  

• Pay should be set in a more democratic fashion with the company’s workforce  given the opportunity to feed into the process, for example,  via an employee representative on the  RemCo 
•  To help all stakeholders understand CEO reward packages more easily,  RemCos  should use fewer complex financial measures and incorporate more environmental, social and governance (ESG) goals  instead 
• RemCos  should ensure that the benefits CEOs and other senior executives enjoy are fair in relationship to what the rest of the workforce receive, such as health benefits and pension contributions 
• The Corporate Governance Code should be amended to require publicly limited companies to report on the ethnicity of their senior management teams and their direct reports.

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