'Fat Cat Thursday' prompts calls for rethink on exec pay

Today, the average FTSE100 CEO has already earned what it will take a typical UK worker all year to, according to analysis from the CIPD and the High Pay Centre.

Board room in shadow
Amid growing shareholder and regulatory focus on corporate pay ratios, calculations from independent think-tank The High Pay Centre, and the CIPD, the professional body for HR and people development, show pay for the UK’s most senior executives topped the median gross annual salary of £28,758 for full-time employees on Thursday 4 January 2018, just three days into the new working year. The figures come as the government is consulting on new corporate governance measures, including on pay ratio publication. They are also prompting calls for a significant rethink on top executive pay, as well as a warning for long-term investors to be more sceptical about the need for outsized remuneration packages at senior levels.

Pay falls, but gap remains wide

The latest data for 2017 suggest some modest restraint by company boards in senior executive pay. FTSE 100 CEO pay fell slightly, taking the mean  down a fifth from £5.4m million to £4.5 million. Median pay also fell to £3.45 million in 2016 (down from £3.97m in 2015).However, the pay gap between the top and average worker remains wide. Despite this year-on-year reduction in total pay among FTSE 100 bosses, the ratio of CEO pay to the pay of the average full-time worker stands at 120:1. Stefan Stern, director of the High Pay Centre, commented: “While it was encouraging to see a tiny amount of restraint on pay at the top of some FTSE100 companies last year, there are still grossly excessive and unjustifiable gaps between the top and the rest of the workforce. Publishing pay ratios will force boards to acknowledge these gaps.”Peter Cheese, chief executive of the CIPD, added: “The drop in pay in the last year is welcome, although relatively marginal, and will have largely been driven by the growing public and shareholder concerns and the Prime Minister’s stronger focus on boardroom excess and plans to reform corporate governance.“It’s crucial that the government keeps high pay and corporate governance reform high on its agenda. We also need business, shareholders and remuneration committees to do their part and challenge excessive pay, to understand pay and reward for top executives in the context of the whole organisation, and look at how pay is linked to driving sustainable performance."
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Engagement and executive pay

With a raft of new research continuing to indicate the important role of shared purpose, integrity and values for staff engagement and productivity, and the progress being made towards greater transparency on pay ratio disclosure, the CIPD and High Pay Centre hope the new data will help maintain pressure on remuneration committees to check and challenge CEO pay levels and performance.Previous CIPD research has shown that excessive CEO pay can have a damaging effect on the workforce. Its survey of more than 1,000 working adults found that:
  • 71 per cent agreed CEO pay levels in the UK are generally too high
  • 60 per cent agree CEO pay levels in the UK demotivate employees
  • 54 per cent agree CEO pay levels in the UK are bad for an organisation’s reputation.

Will the new corporate governance code rebuild trust?

The latest figures are published as the Financial Reporting Council is consulting on its efforts to enhance trust in business and improve corporate governance in the UK. Among the proposals for a revised UK Corporate Governance Code are new laws to require around 900 listed companies to annually publish and justify the pay ratio between chief executives and their average worker. This includes the introduction of the world’s first public register of listed companies where more than a fifth of investors have objected to executive annual pay packages. The first public register was published by the Investment Association in December 2017. It includes more than a fifth of FTSE 100 companies.

‘Time to challenge excessive pay’

“We need a significant re-think on how and why we reward CEOs, taking into account a much more balanced scorecard of success beyond financial outcomes, looking more widely at the impacts of businesses on all stakeholders from employees to society more broadly,' said Mr Cheese.“The current review of the UK Corporate Governance Code provides a great opportunity to consider these issues. In particular, it should broaden board focus and the remit of remuneration committees to ensure there is much more understanding of the wider workforce and corporate cultures, and in particular how to engage employee voice and improve fairness and transparency.”Charles Cotton, senior reward and performance adviser at the CIPD, said: “When considering executive and employee pay, reward decisions must be principles-led, evidence based and outcome-driven. It should be aligned to both financial and non-financial measures of business success, reflecting both short and long-term performance."Executive pay should also be considered alongside how the wider workforce is being rewarded. In a year when real earnings will have fallen for many, excessive reward at the top will be strongly felt by the rest of the workforce.” 

Only 7 per cent of annual reports detail pay gaps

Luke Hildyard, stewardship and corporate governance policy lead at the Pensions and Lifetime Savings Association (PLSA), which represents pensions professionals running pension schemes, added: “Huge pay differences between executives and the wider workforce symbolise how too many companies fail to understand or appreciate the value of their workers.“Pension scheme investors use information about the employment models and working practices of the companies they invest in, including the pay gap between the top executives and the rest of the workforce, as indicators of the corporate culture."While companies spend a lot of time devising complicated and very generous pay awards, our Hidden Talent research found that only 7 per cent of FTSE 100 annual reports detail the ratio between the CEO’s pay and the wider workforce; only 21 per cent provide evidence of how much they are investing in training and staff development; and just 7 per cent show how much they rely on agency workers or other types of insecure employment.“As long-term investors, pension funds think that boards should be more sceptical about the need for vast executive pay awards and focus on explaining how they are fostering innovation, improving productivity and developing a positive employment culture throughout their organisations.”For related news and features, visit our HR section. Look out for the launch of 2018's Relocate Awards, entries open this month. Relocate’s new Global Mobility Toolkit provides free information, practical advice and support for HR, global mobility managers and global teams operating overseas.Global Mobility Toolkit download factsheets resource centreAccess hundreds of global services and suppliers in our Online DirectoryClick to get to the Relocate Global Online Directory