Is it time to reassess CEO pay?

Business leaders have pushed to create a sense of comradery in the last few months, putting on a brave face while the virus continues its march into 2021.

But while many at the top are sitting tight, waiting for the worst phases of Covid to pass, calls from unions and the general public to end the ‘runaway train’ of inequality in corporate Britain are gaining momentum.

It’s a perpetual conundrum. The first week of January sees ever-dramatic news headlines adding fuel to an already blazing fire:

‘FTSE 100 bosses ‘to take home more than average UK worker’s annual salary by 5.30pm today’, new report finds’… ‘UK CEOs make more in first three days of 2019 than worker’s annual salary’… variations of these articles dominated news sites last week.

While they certainly make for attention grabbing headlines, how much truth is there in these statements, and is it time to reassess CEO pay?

How are these vast figures reached in the first place?

Many of these initially shocking statistic rely on exaggerated figures, and do little to represent what is, in essence, a very complex balance of multiple factors.

One way to examine this is by looking at the impact a CEO has on share value – an impact which has vastly increased in the last 50 years. When Chief Exec Angela Ahrendts announced her resignation from Burberry in 2016, it wiped more than £500m off Burberry’s value. On the contrary, when widely unpopular CEO Steve Balmer resigned from Microsoft, increased confidence in the brand’s future and added £17bn to the value.

Pay packets have increased in the last century because companies are larger and handle more cash. When a company is working with such large sums, the difference in profits generated by a moderately competent CEO and a brilliant one is billions. The view of the layman is that sitting in a boardroom isn’t as intrinsically valuable as working as a doctor during a global pandemic, but the market dictates what others are prepared to pay for certain services, thus determining incomes.

Media representation also ignores the fact that the majority of CEOs work bloody hard. The idea that the CEO of any blue-chip company is working 9-5 then clocking off for a cosy evening with his bank balance and a bottle of Chateau Lafite is for the birds. The demands of such a position on time, energy, concentration and family life are total: it is perhaps the only true 24/7/365 job beside those of Prime Minister and monarch.

Has Covid led to CEO pay cuts?

It can be nigh on impossible to access full remuneration figures from the impenetrable forts of many corporates, which means moments of transparency can be leaked in a controlled, considered way. With the initial COVID-19 surge came a wave of announcements of cuts to CEO pay. While this may seem like an honourable move, critics view it as more of a publicity stunt.

Among the most high-profile figures to declare a substantial pay cut was Disney Chairman Bob Iger, who earned £2.4m in basic salary in 2019. Mr Iger, who is worth an estimated $690m, said he’d sacrifice his own salary for the duration of the pandemic. This base salary was, however, only a fraction of his $47.5m package; consisting of a significant bonus, stocks and other benefits. Amazingly, simply announcing this act of goodwill would inevitably boost shares of the company, further increasing the value of his ‘extras’.

Praise of the critical workers during the pandemic has repeatedly led to broader pay comparisons, resulting in the forensic examination of the financial conduct of major corporations. While furlough has been an invaluable safeguard for employees in all levels and sectors, is it fair for taxpayers money to be put towards keeping CEOs in place?

Back in December BDO accountants said it would pay back £4.1m of furlough money after criticism of partners’ £500,000 pay-outs. They’re not alone. With numerous similar incidents suspected, HM Revenue & Customs have been persuaded to publish a list of the companies who have used the scheme by the end of January 2021.

“With billions of pounds of taxpayers’ money going into private companies to support jobs, the least we expect in return is transparency,” said Committee chair Meg Hillier.

On a more positive note, there have of course been Covid success stories, with some firms’ unexpected profits meaning more than £400m of furlough money has now been repaid.

What does all of this mean for businesses?

On a practical level, boards need to be able to attract and retain the very best leadership talent, particularly at the moment while markets are so unpredictable. Appropriate pay structures, which should include share-based compensation and variable incentives, are a crucial part of the package.

No company can afford to lose an effective leader in the middle of a crisis, but it’s worth practicing some restraint when offering carrots: recent studies have suggested that over-ambitious incentives may be detrimental to long-term profits.

The underpinning objective of any pay reform agenda should be less about reducing top pay levels, and more about making all pay fairer. This could be achieved by indexing executive pay to the lower earnings within the company. In the same way that increased rainfall raises water levels in a puddle as well as a lake; increased company profits should trigger proportional pay rises for both executives and the lower paid. Timing of pay overhauls need to be carefully considered, and should depend on the individual circumstances of the company.

Learn more about how ORESA can find the right leaders for your business in tough times and speak to our team today: +44 (0) 203 675 1459 or email Orlando Martins at orlando@oresa.co.uk.