What’s the Story?

This month, The Observer commented on the new £17m package agreed for Pascal Soriot, the AstraZenica CEO, the highest paid FTSE 100 CEO. Mr Soriot has now received some £137m in pay since he joined AstraZenica in 2012; an annual average of some £12.5m a year.

But The Observer fairly notes that this pales beside the huge packages on offer to the CEOs of US S&P 500 companies. The Alphabet CEO received $226m in 2022, and the CEO of Palo Alto Networks $151m.

Vitally though, this is not just about the top-end CEO pay outliers. The average FTSE 100 CEO in 2022 earned only 1/3rd of the average S&P 500 CEO. That pay gap has widened since 2014, when FTSE 100 CEOs earned roughly half the average S&P CEO. Over that nine year run, the UK CEO figure drifted downward, while the USA figure has risen; resulting in a strong widening of the jaws.

This unaddressed gap is causing city concerns over talent retention. A string of high level defections can be seen in recent years. These include the Smith & Nephew CEO Namal Nawana who jumped ship in 2019 when the company failed to deliver on a major up-shift in his then package of c.£6m. Indeed, Reckitt Benckiser lost their CEO in mid-reconstruction, when Starbucks blew away his then £6m 2021 package, by offering $28m stateside. Who would not leave for a package nearly four times bigger?

Last year Julia Hoggett of the London Stock Exchange started a “Big Tent” discussion on UK top pay, in light of concerns about the UK stock market competitiveness in attracting IPOs and retaining the listings of major and fast growth companies. The LSE CEO David Schwimmer said to The Observer that the

 “UK needs to take the US standards of compensation seriously for London to attract world-class companies and attract world class talent.”

The Investment Association and its 250 member firms are aware of the debate, and following consultation with nearly 100 major companies in Autumn 2023, plan a “fundamental review” of their Principles of Remuneration to be published later in 2024. Andrew Ninian, the lead on these matters for the Investment Association, is reported as expecting that it is “very clear that the UK will not close the UK:USA pay gap in full, but that a step towards that aim might well be on the cards”.

Why Does it Matter?

Top pay in the UK is a magnet for shock-horror Fat Cat and Payment for Failure news stories. Government has responded by giving investors strong voting powers over top pay policy and encouraged them to exercise vigilance and clamp down on company pay excess and abuse.

Many in the UK governance industry, those in investment houses, proxy agencies and trade bodies believe it is their duty to hold the line on top pay excess and root-out poor practice. As with the Inland Revenue; they often approach their task with a deeply cynical mindset. The job is to catch the abusers; and deter the others from trying it on.

This has lead companies and advisors to respond in kind. Some consultations with shareholders can degenerate into going through the motions. Sandbagging proposals, due to expected push-back, is not unknown (understatement) and adds strongly to the distrust between shareholders and companies.

This mindset is reflected in The Observer article when it speaks of the £17m AstraZenica package causing a “sharp intake of breath”, and describe it as a “generous payout” which “invoked anger from corporate governance experts”. Indeed, the “Comply or Explain” principle underlying much of UK corporate governance all too often is approached as “Comply or Else” by some shareholders.

In some cases this has unfolded into a full blown investor revolt, as seen for Unilever in 2023, when the inbound CEO package was voted down with 60% against. And earlier this year too, at Pearson, where the bonus maximum of 200% change to 300% attracted a 46% vote against.

Almost all companies are trying to run a strong and competitive business; and pay their top team attractively on success. There are some bad apples no doubt, but the evidence suggests increasingly that UK governance of top pay is damping competitiveness with a dead-weight cost to the UK economy overall, and the LSE in particular.

Newspoint View

CEO pay is the highly visible, top part, of a long tent pole. How that top end is defined and structured matters a lot. But what also matters is that it sets the size and shape of the whole tent too. Correctly done, it allows space and headroom for a large group of senior folk to be paid in a strongly competitive way, without breach of internal pay structures, mangled pay differentials or neutered incentive designs.

The fundamental review by the Investment Association of the Principles of Remuneration is welcome, and the hope is that it will deliver:

• Slimline governance rules attaching to various bells-and-whistle pay items;

• A re-framed approach to quantum, to allow well researched change to be accepted with less friction; and

• A shift in governance culture, away from witch-hunting, and onto delivering high pay for high performance.

Getting the high pay for high performance link correct is hard, but essential. RemCo Chairs should be applauded when they get this right, and challenged when they do not. 

If the fine minds of the UK investment industry can be co-joined to help with that difficult job, that would be welcome indeed.

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Please feel free to email or call:

Damian Carnell - [email protected] +44 (0) 7989 337118

VA Bec Bostock - [email protected]

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