Happy New Year! As is customary when commencing a new year, we are encouraged to put the past behind us, let go of our previous grievances and make resolutions that ultimately will make us better people. Like many of us, I start off with the best intentions but more often than not I get about three weeks into January and things start to slide! However, I do try to keep a positive sentiment and view the new year as a chance to forget the challenges and stresses and strains of life and move onwards. It does strike me as a shame though, that the general view on excessive pay doesn’t evolve in this manner. Imagine my dismay when Friday 4th of January 2019 was declared by many news providers as “Fat Cat Friday”. This ridiculous concept is meant to mean that on Friday 4th the average CEO in the UK earnt the same as the average UK worker would earn in the entire year – cue sharp intakes of breath and discontented grumblings!
Fat Cat Friday wasn’t the end of it, we also saw the CIPD along with the infamous “High Pay Centre” publish a report calling for wider RemCo reforms to challenge executive pay, with lots of inflammatory language and cries of foul play! Reading both reports, I couldn’t help but feel deflated that again the constant British focus of perceived corporate greed grabs the headlines as if it is the cause of all evil, when, we have far greater problems that we are failing to address in the UK. I think it’s time to get real about executive pay and as such, I thought it was something I should attempt to address.
To start off its important to appreciate the factors that drive this negative sentiment. We are still stepping out of a post-recession economy. Economic growth has been at is slowest for the last decade and, unlike most recessions, we never saw the “boom” that followed the “bust”. The repercussions of the 2008 global financial crises are still being felt and many experts argue that the economic impact was similar to that which followed the World Wars. We experienced a war, but on our economy and have hardly recovered since. Other factors have also contributed to the sluggish growth of the UK economy such as coalition governments, Brexit, several elections, increased regulation, the death of the high street, Trump etc.
Often during periods of economic challenge, those impacted the greatest are the general public, in particular workers on lower wages. Add in the culture of austerity that we have been living with for nearly eight years, on top of the slowest wage growth for a decade; workers within the UK have taken an absolute battering. Policy changes in 2013, which made votes on remuneration policies within listed businesses binding, and ever-increasing scrutiny around directors remuneration reports – executive pay has all of sudden been catapulted into the living rooms of Joe public with CEO earnings splattered about like numbers being be called out at Friday night bingo!
Some reports criticised and questioned (rightly!) the salary increases for CEO’s at companies like Burberry, or bonus payments at BP where financial losses were made. However, most focused purely on the numbers, simply because they sounded outlandish and excessive. The most memorable for me was Martin Sorrell’s £63 million payout back in 2015/16. Now first things first, Martin didn’t receive £63 million in his back pocket in one lump sum. This was an award made totalling up the value of his shares during a period where the companies value doubled from £9 billion to over £20 billion. These shares would be subject to clawback and other performance conditions, so although the value placed is correct, he certainly didn’t receive that amount in his P60! WPP as a firm had enjoyed some fantastic results and Martin at the time was the longest serving FSTE 100 CEO in British history, ensuring stability and growth of the brand over a 30-year period. The papers went to town on the story, using salacious terms referring to Martin as a “Tycoon” and “Advertising Magnate”, implying he had done something wrong. The main accusation levied was that it was just such a large amount of money and somehow not fair on other employees at WPP.
I agree that £63 million is an extreme sum of money but equally, all the papers failed to mention that this award was only given in relation to Martin and WPP achieving targets set out in the remuneration policy that shareholders had previously (resoundingly) approved. Martin didn’t award himself that pay-out and didn’t design the remuneration policy, he simply achieved what he was asked to achieve and received an award because of it. Just because the number is large doesn’t mean it’s unfair or unjustifiable, but the good old High Pay Centre suggested that the disparity between the CEO’s pay and the general employee is so vast that it is somehow unjust??
This is where I just can’t get on board with this anti-wealth sentiment, CEO pay ratio reporting, Fat Cat Friday and similar shock tactics. The numbers we see in the press are all based on remuneration policies for listed businesses that are voted on by shareholders, they are not awards given out willy nilly at the tables of middle-aged men with rotund chests smoking cigars, that the Daily Mail would have us believe! Surely if someone is given a target and they are promised a bonus if they hit that target then surely you can’t bemoan them taking home a reward based on their achievements, even if that award is out of kilter with their peers and colleagues? At some point surely, we have to accept that consistency around remuneration doesn’t necessarily equal fairness!
Google financially award employees based on their contribution not just in relation to their pay grade or level. They appreciate that you may have two developers in the same role but one could achieve outstanding results in a year compared to the other. Is it fair to pay them the same salary and a similar bonus to avoid complaints even though their personal contribution was vastly different? Additionally, Google knows that for a good developer there is always another competitor around the corner willing to offer considerably more, so they have to recognise individual talent accordingly.
I often look at the churn of articles coming out of the CIPD and the High Pay Centre and think “what is your solution?”. The RemCo reforms they suggested recently were frankly ridiculous in my opinion, with the main point being for shareholders to ultimately have more power on Directors Remuneration Reports (DRR), a concept we all know is coming anyway. It won’t be long before votes on DRR’s become binding and that is a concept that will really cause some challenges, some for the good, some for the bad! The rest of the proposed reforms were unrealistic and if I was a CEO of FTSE listed business I would have found some of them frankly insulting.
If anything, it almost feels like the view is that CEO’s have a bit of an easy ride and it’s not that hard and companies can’t be held to ransom and fear the financial implications of a CEO departure based on a pay disagreement. I think that is an incredibly dangerous and almost arrogant approach to take suggesting that executives are no more skilled than the average employee and as such shouldn’t be treated with the reverence that they are afforded in society. Within uncertain times investors are jittery at best and any CEO departures across the FTSE index will wipe millions of pounds off the value of a business, which inevitably has dire consequences for all employees. It doesn’t take much for investors to lose confidence in a business and firms need to think very carefully about structuring director remuneration. Striking that balance between what is competitive and incentivising versus what will keep them out of the tabloids and avoid the scrutiny of the High Pay Centre.
At some point we must accept that in the main executives of listed businesses spend a lifetime working hard and committing to their organisation, sacrificing much along the way, and this is why they receive pay which some find ostentatious. I for one don’t look at CEO’s with envy and wonder at their millions, because of the lengths they have to go to earn it, the pressure they are constantly under, and the vilification they often receive from individuals who don’t really understand how they are paid what they are paid. However, where I support the CIPD and the High Pay Centre is their concern around private company pay and some of the figures we hear about in businesses that face little or no regulation or public scrutiny. Private companies that still often don’t have “proper” remuneration committees, where executives can still fundamentally pay themselves unbelievable amounts of money are very much still commonplace.
The revelation from Bet 365 and their CEO, Denise Coates, receiving a total comp number of £265 million for 2018 was incredibly disappointing to see. Consider that figure compared to the CEO’s of UK’s major banks, whose combined total compensation for 2017/18 was just over £26 Million, it puts it into perspective. Consider also that these five banks provide employment to over 300,000 people in the UK and that these institutions form a vital backbone to our economy both in regard to tax yield and consumer lending. I would ask you to compare the impact that these firms have versus an online gambling organisation that fuels addiction, ruins families, and employs 4000 staff many of whom earn barely more than minimum wage, I think you can start to see where the problem might lie!
People still assume that bankers like Jes Staley (Barclays) And Stuart Gulliver (HSBC) represent what is wrong with executive pay when for me the real issue is probably the one we aren’t talking about enough i.e private company pay. I agree that executive pay needs to be monitored carefully and regulated more effectively but the firms we currently scrutinise and hear about in the press are the ones who are already facing stringent tests from shareholders on an annual basis. Let’s get real about where the problems with executive pay lie, and not focus on the Daily Mail gossip of Director’s Remuneration Reports.
The High Pay Centre and the CIPD aren’t targeting the root of the problem, they are merely whipping up a constant storm of negativity that doesn’t solve anything. I honestly for the life of me can’t work out what people like Jes Staley at Barclays think when they hear about CEO pay of people like Denise Coates compared to his pay of £3.8 million for 2017. If I found out that an executive with similar levels of business experience earnt 70 times my annual earnings for running a much smaller company with less public scrutiny I might choke on my soup! For the constant pressure and stress associated with maintaining the performance of a vital UK financial institution; for the vilification, the never-ending hatred, and the constant finger pointing by people like the High Pay Centre. For the fact that his pay is subject to clawback and malus and most of his awards will only vest over a 5, 7, or 10-year period; at some point, Jes Staley must think “Why do I bother with this??”