Julia Hoggett, CEO of the London Stock Exchange, made headlines recently with her view that UK-based executives should be paid more to tackle the increasing sense that ‘London is being left behind’.
Couched in the broader debate about UK corporate competitiveness, her views have found sympathetic ears among some (but by no means all) asset managers, prompting suggestions of an ‘emerging divide’ within the City over executive pay.
However, executive pay is not the main criterion creating a lack of competitiveness in the London market. Regulation, taxation and buyouts by private equity firms all play a part, as does the reality that after Brexit there has been some transference of capital to the continent.
UK pay is competitive
Contrary to recent headlines, UK executive pay is competitive. Indeed, UK executive pay is high in comparison to European peers and is certainly much more competitive than pay rates in Asia. A key reason executive pay in the UK is below US peers is because pay in the US is seldom opposed and has run rampant.
At the upper end of the spectrum in the UK, a FTSE 30 CEO is likely to be on a package that can deliver £5-10m per year. This is an ample reward structure that needs no further enhancement; we continue to see pay packages ratcheted upwards – with bonus and LTIP maxima drifting higher.
The US is and has always been an outlier where CEOs can typically earn $15-20m with fewer performance obligations and hurdles. A race to the top is placing increasing emphasis on greed rather than the pride and privilege of heading up a major FTSE100 business.
Within the context of UK variable pay structures are already becoming more US-like with an increasing contribution from ‘doing the job’ i.e. increasing the amount that pays out at threshold and a greater tilt towards personal and strategic objectives and away from financials – on a maximum of 400%, 25% vesting at threshold equates to variable pay of 100% salary for just doing the job.
At EdenTree we have clear long-standing policies on pay and consider the quality of disclosure, how stretching are performance targets and the potential for excess as drivers for our response. In general, we view ‘excess’ to equate to more than 300% in variable pay per annum. This means we oppose nearly all FTSE 100 packages where the average multiple is more than 400% salary.
Two years ago, we approved several remuneration packages of FTSE 100 companies. With management teams tending to use foregone Covid earnings as an excuse for egregious pay proposals, the number of approvals has now dropped to zero.
A sense of fairness
On wider cultural grounds, US-style pay would be out of step in the UK, given the prevailing sense of fairness and the glaring cost-of-living crisis. The basic salary of the UK prime minister is an oft-cited benchmark when news breaks of eyewatering executive pay rates, such as that seen recently from the oil majors: Shell’s boss took home £10m in 2022.
While Shell’s pay bonanza certainly raised eyebrows, Alphabet’s boss is set to receive some $250m spread over three years (i.e. $83m per year). Admittedly this is an extreme example, but it is roughly eight times the extreme example from the UK.
There are wider considerations in terms of the systemic risk that runaway pay can introduce.
History shows that when incentives become detached from performance, shareholders or, indeed, taxpayers, end up carrying the can. The lead up to the global financial crisis was an extreme example of misaligned incentives, while the recent bank failures in the US have highlighted once again the triumph of greed over stewardship, where executives have enjoyed years of massive reward through share-based compensation, while making poor risk management decisions.
Investors in US companies would be right to ask whether there are similar skeletons in the closet, with the era of cheap debt spawning an unhealthy culture of debt issuance in support of share buybacks, ostensibly with shareholders in mind, but with a clear eye to share-based schemes linked to earnings per share ratios that are boosted when a company buys its own stock.
The UK should not be seeking to ‘match’ or ‘emulate’ US packages given the culture and social context are very different. To do otherwise will be seen as a campaign to reward greed, which is not the key driver shareholders are looking for in retaining talent and progressing a more equitable society.
