Whilst competitive pay is undoubtedly a factor in attracting and retaining talent, it is rarely the sole, or even a major, determinant of a company’s decision to list in a particular market, says Paul Arathoon
The recent moves by some of the FTSE 100’s largest companies, such as British American Tobacco and Compass Group, to enhance their chief executives’ pay packages to look more like US CEO arrangements have reignited the debate on executive compensation in the UK. This trend, which has been encouraged by the London Stock Exchange Group and Smith & Nephew’s recent successful executive pay adjustments, raises important questions about the future of UK business competitiveness and the dynamics between companies and their shareholders.
The argument for increasing executive pay is primarily centered around the ability of UK listed companies to attract and retain top executive talent and enhancing the UK’s competitiveness on the global stage, particularly given London’s well-publicised struggles to win new IPOs in the face of competition from particularly New York.
Prominent figures, including London Stock Exchange boss Dame Julia Hoggett, have advocated for higher executive salaries as a means to prevent the exodus of talent and to encourage more companies to list in London rather than overseas. In an increasingly globalised market, where top executives have the option to relocate to jurisdictions offering more lucrative compensation, and where institutional shareholders are less likely to complain or vote against executive pay packages, this argument holds some weight. However, is this really the solution for the challenges facing the UK’s financial markets? There are after all a finite number of very highly paid listed company CEO positions.
Whilst competitive pay is undoubtedly a factor in attracting and retaining talent, it is rarely the sole, or even a major, determinant of a company’s decision to list in a particular market. Other factors, such as the overall regulatory environment, market depth and liquidity, and investor base, arguably play more significant roles. The UK must address these broader issues to create a more conducive environment for listings. For instance, simplifying regulatory processes (which recent changes to the UK Listing Rules, together with anticipated changes to the prospectus regime, are starting to do) and enhancing market infrastructure will likely have more impact in the long term than merely adjusting pay scales.
A holistic approach
Moreover, the focus on executive pay risks overshadowing the need for a more holistic approach to corporate governance and performance. UK institutional shareholders have historically been wary of disproportionate pay rises that are not aligned with company performance or shareholder value. The challenge lies in structuring compensation packages that not only attract top talent but also incentivise long-term growth and aligns the executive with shareholder interests (i.e. value creation). Transparent and performance-linked pay structures should mitigate shareholder concerns, however, investors have historically criticised the complexity and opaque nature of long term incentive plans and the fact that, more often than not, they tend to pay out to the executives even where shareholders see underperformance.
The potential impact of rising executive pay on shareholder relations cannot be overlooked. Shareholders are increasingly vocal about their expectations for fair and justifiable compensation practices. Companies must navigate these expectations carefully to avoid shareholder dissent and potential reputational damage. Engaging shareholders early in the decision-making process and clearly communicating the rationale behind pay adjustments can help in maintaining trust and support, although ultimately that is no guarantee that shareholders will agree with any proposed output.
In conclusion, while increasing executive pay may be a step towards retaining talent and boosting competitiveness, it is not a silver bullet for the challenges facing the UK’s financial markets, particularly at the mid and small-cap end where CEO pay will never reach US levels. A balanced approach that considers regulatory improvements, market conditions and shareholder engagement is essential. By addressing these broader issues, the UK can create a more attractive environment for listings and ensure sustainable growth for its public companies. The conversation around executive pay should be part of a larger conversation on enhancing the overall competitiveness and attractiveness of the UK markets.
Paul Arathoon is partner in the corporate team of law firm Charles Russell Speechlys