When Julia Hoggett, boss of the London Stock Exchange, asks for a “big tent” conversation on pay, with a broad, “constructive” look at whether the UK market needs to rethink how it remunerates top executives, I just think of a circus.
This debate has become something of a three-ring spectacle. The complaint is that UK investor attitudes to pay are preventing companies from attracting the best people. Investors are responding to client pressure and to government policy, through “say on pay” votes at shareholder meetings and requests for disclosure of pay ratios between bosses and workers. There isn’t a big top big enough to convince the general person or policymaker that an average pay packet of £4.3mn in the FTSE 100 is the root cause of what is holding the country back.
US pay does seem to have pulled ahead in recent years. But that’s in part because pay generally correlates with company size and the US is a bigger market and richer country. UK executive pay still compares favourably to Europe, according to Xavier Baeten at Vlerick Business School, although that is more true for the median CEO than the top performers. In the interests of being constructive, what discussion could usefully take place in Hoggett’s tent?
First, it could get out of the realm of anecdote. “Surprisingly, there’s not a readily available database that enables consistent comparisons of CEO pay in different countries, taking full account of factors like company size, the level of risk in the pay package, and significant differences in local tax and pension regimes,” said Tom Gosling, at London Business School. While we’re at it, how much influence do proxy firms really have in determining how shareholders vote? Estimates for how much of the vote they sway range from 10 to 40 per cent. Complaints about pay are longstanding so how and where is this a real problem for hiring now?
Second, is there really a one-size-fits-all solution? Some UK-listed companies genuinely play in a global market for top hires, but plenty don’t.
Take education group Pearson, which last week had 46 per cent of investors vote against its pay policy for US-based boss Andy Bird who came from Disney. The bulk of its business and employees are in the US, the company and stock are (finally) performing well. But proxy advisers objected to the policy based on UK comparisons and “quantum”, while similar sums are deemed fine stateside for smaller competitors. Hoggett’s complaint about double-standards is reasonable. Does addressing that issue inevitably spill over into higher pay for the entire market?
Third, there seems to be a problem with a tortuous process and not just the resulting numbers. Everyone complains that pay takes up too much time and dominates interactions between companies and their investors.
This is partly because investors want to show their workings. It owes something to a — somewhat justified — lack of faith that boards will push back against dominant bosses. It may also be because the typical UK pay model is complex and ill-suited to the company concerned. Efforts to offer simpler alternatives or more flexibility, for example through use of restricted stock, haven’t got far.
Fourth, the asset management industry needs to grapple with its own divisions. The idea of a sector torn between money managers and governance fanatics may be overblown: research from London Business School found the proportion of portfolio managers and governance experts that thought pay too high was remarkably similar, both north of 70 per cent. But there is obvious ill feeling and furious debate within the sector about how it handles pay issues, a boil that probably needs lancing.
Fifth, does rethinking pay chime with the “scrappy and hungry” market that Hoggett herself wants London to become? Boards should have to make the case for unusual packages, and take some investor dissent on the chin. Executives should have to earn their way into blockbuster numbers on the back of success, not on the promise of it. Both happened with Pascal Soriot at AstraZeneca — successfully, according to the chair this week. Higher pay for sluggish performance doesn’t fit with an entrepreneurial, upstart image.
Debating pay is a high-wire act, one that risks entrenching division within the City and provoking a backlash outside it. Plaudits to Hoggett for taking it on. She’ll do well to avoid a clown show.
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What could usefully happen in the UK’s ‘big tent’ conversation on pay
