How much is too much? The CEO pay predicament

One could be forgiven for thinking that the boss of a company, which has seen its share price underperform by around 10 per cent in the past year, thanks to lower-than-expected earnings and a slump in profit could expect to forego a pay rise.

Were it to transpire that this same boss was already the best-paid CEO in the FTSE 100—who took home a package of £17.2m last year—and one might then conclude that he was, if anything, in line for a bit of a haircut.

Yet when Astrazeneca, the Anglo-Swedish pharmaceutical giant, examined this performance from their veteran CEO, Pascal Soirot, they did not resolve to reduce the boss’s pay. Rather, they deduced that he was being short-changed to the tune of £1.8m.

Allies of Soirot would, we imagine, have argued that this characterisation of Astrazeneca’s performance is slightly unreasonable.

While profit was down, overall revenue was up, and the firm’s forecast, it claimed, was strong. But the facts remain that despite the share price (at best) stuttering along and the starting point for any negotiation for Soirot’s new remuneration package being higher than any other public company in the country, the board felt he deserved a pay rise.

Astrazeneca is no black sheep. Clarkson, Centrica, and the London Stock Exchange Group have all caused stirs with the remuneration resolutions they have taken to their shareholders.

And a recent analysis by Deloitte found that one-third of the 55 companies to have published their annual reports so far have sought shareholder approval for more generous executive remuneration packages.

Who decides how much CEO gets paid?

Before examining why CEO pay has jumped, it is worth exploring how bosses’ packages are agreed upon.

A body of board members is responsible for setting pay, known as the remuneration committee (Remco). To inform the remuneration packages and structures it recommends, the committee will consider the overall health of the business, including financial performance, cash flow and debt, how the wider sector has performed, and, increasingly, whether the firm has hit ESG and diversity targets.

They will also use pay as a means of incentivising the CEO and other directors to perform better in the future, offering shares or bonuses that are triggered if the boss is able to hit a set of performance metrics by a certain date.

At a public company, the board will then take any change in executive pay recommended by the Remco, and propose it to shareholders accompanied with a recommendation.

As in the case of Astrazeneca, the shareholders will then vote to approve or reject the new deal at the firm’s Annual General Meeting (AGM).

Why is bosses’ pay going up?

Ostensibly, now looks like an unusual—even misjudged—time for CEOs to receive a major pay rise.

The UK has been battling a cost-of-living crisis, in which average earners’ pay is still catching up with two years of high inflation and which has precipitated several redundancy rounds in FTSE 100 companies. This was preceded by a post-financial crisis period characterised by average wages that fell in real terms.

But as Matt Young, a Partner at Apella Advisors, a corporate and financial communications advisory, said, the domestic context, while important, is only part of the equation that Remcos need to consider.

“If we, as a country, want to compete for the best talent and keep that talent in the UK, then we need to think differently about executive reward. Post-financial crisis, the UK—and to a certain extent Europe—put in some of the most onerous rules around executive pay, meaning other markets like the US are now worlds apart from us.”

Young cited a vast gulf in pay between CEOs of companies listed in the US and the UK. Indeed, despite having roughly similar revenues, Shell’s CEO Wael Sawan was paid £7.9m in 2022, while Exxonmobil’s Darren Woods took home a pretty $36.9m (£29.9m).

This, Young believes, has led: “Companies to consider where’s best for them to list and be aptly rewarded for their success. At the moment that place doesn’t appear to be the UK”.  

He continued: “Undoubtedly, the US has much deeper capital markets, and their less risk-averse capital culture means then comes into it. But executive remuneration certainly forms a part of the picture.”

These frustrations with the UK have been amplified by other burdensome requirements and mixed messages from stakeholders, says Mitul Shah, a partner in Deloitte’s executive remuneration practice.

He said: “In recent years, we have seen a growing frustration in some UK boardrooms around the gradual emergence of a wide range of complex requirements and often divergent proxy or investor views around pay.

Shah added: “These have led to a position where pay constraints – in particular those around pay structures – are substantially more onerous than those seen in other markets.”

How necessary is the uptick in CEO pay?

Others believe that UK-listed firms, particularly those with operations and workers located mostly in the UK, would be better advised to spend any surplus money on a pay rise for normal staff rather than the CEO.

 “We’ve got huge productivity here problems and some of the lowest levels of employee engagement,” said Duncan Brown, a principal associate at the Institute for Employment Studies (IES).

Brown added: “Someone on the minimum wage gets about £20,000 pounds a year. To give a thousand people at the less well-paid end of a company a thousand pounds more each, would often make a far greater difference at a company than a £1m uptick in pay for a CEO who’s on £4.5m.”

Where companies are forced to fish in the same talent pond as large, American competitors, then the argument has wider support. Indeed, British Aerospace, which has a large footprint in the US and is forced to compete for employees with US defence giants like Lockheed Martin and Northrop Grumman, is said to be considering setting up a separate US Remco.

Brown readily admitted this would be the case in some instances: “Of course there are individual examples like Smith and Nephew [which in March sought a pay premium for US executives after its Chair called it a ‘Brilo’ – British in Listing Only]. But the vast majority of market executives in FTSE 100 are Brits and their companies are based here.”

How to avoid the reputational beartraps of a bumper payday

Despite the groundswell of calls to bring our pay packages closer to those available across the pond, closer to home, the UK is not an outlier.  Data from careers board Lensa, found chief executives in the UK to be by far the best paid in Europe relative to their colleagues. And looking further east, CEOs in Japan can expect to take home just a third of what British bosses get.

All of this has meant that some British stakeholders, including a growing number of consumers that factor a company’s social footprint into purchasing decisions, have little patience with already well-paid bosses being given even more. And consequently, doing so has become fraught with reputational pitfalls.

But boards and shareholders also need to be cognisant of one group in particular. “There are a number of academic studies which show that concepts of collective identity at a company are damaged where there’s high CEO pay,” said Brown, “and this does have knock-on effects to retention, morale and productivity.”

But when Remco does feel obliged to offer a CEO a radical pay proposal, Apella Advisors’ Young, who spent six years as Lloyds’ Corporate Affairs Director, said certain steps can be taken to minimise any fallout or dissent.

“If you want to avoid the reputational beartraps, engage and engage early. Do that with your investor base but do it with your stakeholders as well…

“It’s really important that any rise makes sense to the person on the street earning £30,000 because what they are going to see in the media is a very large number. They need to be able to understand how that person’s pay relates to their performance and the success of the business.”

In the end, the Aztrazeneca’s board managed to see off a large shareholder rebellion and pass Soirot’s new remuneration package at the firm’s AGM earlier this month.

Whether or not the boost will give the pharma company the shot in the arm it needs to stay in the UK, or cause resentment and malcontent to spread like the Coronavirus disease its vaccines helped stymie, time will tell.

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