A further unearned and disproportionate increase in the size of executive pay packets

By 08.07.13BlogSeptember 2nd, 2020No Comments

Luke Hildyard on a yet another pay increase for FTSE 100 CEOs

The annual Manifest/MM&K executive director Total Remuneration survey was released this week, showing that take home pay for the average FTSE 100 CEO was up to £4.3 million in 2012, an increase of 10 per cent on the previous year.

Much of the media coverage has focused on the Burberry chief executive Angela Ahrendts, who received £16.9 million, the highest of any UK-based executive. It was the first time a woman has topped the list.

This was unfortunate.

Firstly, Ahrendts doesn’t really reflect a wider trend of glass ceilings shattering. She is still one of only three female executives across the FTSE 100. It is also worth noting that she is American, and only moved to the UK in 2005. Marjorie Scardino, the retired Pearson boss, and Cynthia Carroll, who recently left Anglo-American, two other high-profile female CEOs of UK companies, are also both from the US.

So the number of British women getting opportunities to develop their career at the top of our leading companies is even worse than the already-depressing statistics imply.

Secondly, the focus on Ahrendts detracts from the fact that the growth of executive pay continues to far outpace pay growth for ordinary workers. This is principally the result of a 42 per cent increase in so-called ‘long-term’ incentive plans, or LTIPs.

These normally take the form of shares awarded to executives if the company’s share price increases beyond a certain threshold over a three year period.

LTIPs from 2009 were granted at a time when the market was still recovering from the crash. Economic conditions have changed considerably since then. Stocks have rallied, in part due to the trillions of pounds effectively pumped into it as part of the Bank of England’s Quantitative Easing (QE) programme.

This has meant a significant windfall for executives. Share price targets that seemed ambitious from the low point of 2009 have been achieved with relative ease, but this is because of wider circumstances, rather than the collectively brilliant leadership of British companies.
What is ostensibly called ‘performance-related pay’ is actually more to do with being in the right place at the right time. In very rare instances, some CEOs have accepted this. Herbert Stepic, the CEO of Austrian Bank Raffeisen, returned a €2 million bonus, acknowledging that it wasn’t really applicable to the performance of the Bank.

Though it’s important not to lionise Stepic as a model banker – he’s just resigned as part of a tax probe – declining the bonus set a welcome example.

In the majority of cases, where executives have gratefully cashed in their LTIPs, the consequences are likely to be terrible for the morale of ordinary company employees, and therefore for business. Nobody wants to work long hours with no pay rise while the boss rakes it in.

They will also raise more general questions about the value or purpose of performance-related pay. It is debatable whether one can measure success in a highly complex role through a quantitative target (or series of targets), particularly when using the results of a company to judge the performance of an individual.

As has been demonstrated, performance is also greatly affected by context, over which the individual, and indeed the company, have little control.

Many would argue that a company-wide profit sharing scheme involving all employees would be a more appropriate form of variable pay. A further unearned and disproportionate increase in the size of executive pay packages only strengthens their argument.

(This article initially appeared on Left Foot Forward)