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The FTSE 100 pay squeeze is on – or is it?

The FTSE 100 pay squeeze is on – or is it?
August 24, 2017
The FTSE 100 pay squeeze is on – or is it?

The High Pay Centre attributes this fall to political pressure, public disapproval and campaigning. There’s some justification for saying that these factors are responsible for pay restraint – few would disagree with the sentiment. But its headline figure is not really comparing like-for-like, for the following reasons: 

  • During 2016, five of the FTSE 100 constituents changed. Adjusting for these, the like-for-like fall in average pay becomes 15 per cent.
  • Averages can hide hefty outriders. Among the top 10 highest paid alone, four received far less in 2016 than 2015.
  •  Excluding these two camps, the average for the remaining 90 chief executives fell by only 8 per cent from the previous year.

So the pay received is moving in the right direction, but not across the board and not as dramatically as might first appear. The review notes that the 32 lowest paid chief executives in the FTSE 100 actually received more last year, not less. Chasing the median, the centre suggests. Or could it be sterling's decline? Sterling-denominated share prices tend to rise more in companies with foreign earnings, and share awards are the strongest influence on pay at this level. Similarly, sterling-denominated salaries will also appear to rise for those chief executives paid directly in a foreign currency.

 

Market factors

The centre draws conclusions as if it has reviewed the current pay packages of chief executives. But the data show how much was received in 2016: that’s an important distinction. They are based on the published single figure of total remuneration, which includes shares awarded in previous years (subject to performance conditions) that matured last year; not those newly awarded. So what the review partly illustrates is the outcome of pay packages that applied a few years ago, which in turn depend on the vagaries of the stock market.

Take the pay of Carolyn McCall, departing chief executive of easyJet (EZJ). At first glance, she appears to have had a massive pay cut: in 2016, she received £1.5m, down from £6.2m in 2015. In reality, her pay has bounced along the same roller coaster that easyJet’s long-term investors ride on (see table).

Date of awardShare price on awardDate of maturityShare price at maturityValue of share awardSingle figure of total remuneration
2012£7.372015£16.99£4.6m£6.2m
2013£14.992016£10.78£0.5m£1.5m

As for this year, before Dame Carolyn jumped ship to ITV (ITV), easyJet had guaranteed her a salary of £0.7m. Perceived success could have boosted this to 'up to' £4m; with 58 per cent in shares, most of which would go into her 'single figure' in three years time when they mature. By then their value would have been amplified or shrunk by the market. If top pay is to reduce, this 'up to' element needs to go down and performance judged harder, but the review does not cover this.

However, there is other evidence that maximum pay is being trimmed. For example, under shareholder pressure, the Imperial Brands (IMB) board withdrew an annual meeting vote that would have increased the maximum for its chief executive, Alison Cooper, to £8.5m. And they were far from being the only one.

The time-shift in top pay has another consequence. New–in-role chief executives will appear to be paid less – because they are less likely to have maturing awards. This certainly applies to Véronique Laury at Kingfisher (KGF), who has received significantly lower total pay than her predecessor. But strip out matured share awards and it is about the same. Her shares are still in the pipeline. 

Female chief executives might well be on similar packages to men, but this won’t become evident in the single figure of total remuneration until more have become established, when – in theory at least – pay should even up. But there is some way to go. At the moment, only seven FTSE 100 companies have female chief executives.

 

What price life?

The centre mentions several apparent anomalies in pay last year. It thought it odd that Anglo American (AAL) more than doubled the bonus of its chief executive, Mark Cutifani, when workplace accidents killed eleven employees, compared with six in 2015. He received £4m in total pay in 2016 (2015: £3.5m). 

His bonus is calculated by a formula, half of which is driven by earnings per share. This in turn largely depends on commodity prices (which are beyond his control). The other half depends on personal objectives, on which he scored highly. Anglo could point to a “heightened focus on safety throughout the group, including an increasing emphasis on critical controls and more thoroughgoing safety initiatives". Recordable injuries were down by close to a quarter but tragically, some of their people on the ground (or rather under it) cut corners on the company safety policies and that’s how several of the miners died. Yet at the end of the day, Mr Cutifani is ultimately accountable and the centre questions whether Anglo’s remuneration committee exercised its discretion sufficiently. 

There was no such question about BHP Billiton (BLT). The impression is not so much that its chief executive sacrificed his bonus, but that Andrew Mackenzie would have been horrified to be offered one. In the media conferences following the dam failure at Samarco, he appeared visibly mortified. The sludge slide of iron ore tailings and mud that swept over the town of Bento Rodrigues in late 2015 caused 19 deaths, untold injuries and massive pollution. “It is hard to be positive about our safety performance in the shadow of Samarco,” Mr Mackenzie wrote in the BHP annual report, but he could at least point to “strong improvements at BHP sites, such as no fatalities and a 20 per cent decrease in high-potential injury events.” The dam is a joint venture of Vale and BHP and they now face a $50bn lawsuit. His pay in 2016 halved to $2.2m (2015: $4.6m).

At Carnival (CCL), the problem was a lack of management control. Late last year, the US Department of Justice fined its subsidiary, Princess Cruise Lines, a record $40m for deliberate acts of pollution. Instead of collecting oily contaminated waste in its bilges, the Caribbean Princess disgorged it directly into the Solent, saving the cost of offloading it in Southampton. Worse, when they learned that one of their engineers had blown the whistle to UK coastguards, other engineers on board hastily dismantled the offending bypass pipes and the crew was ordered to lie about it.

A one-off perhaps? Apparently not. It turned out that the Caribbean Princess had been doing this since 2005 – and illegal practices were also uncovered on four other Princess Line ships. In levying the fine, the US Department of Justice blamed the culture and management. “The Carnival family of companies has a documented history of environmental violations…” it said. No mention of this appears in Carnival’s 2016 annual report, which instead trumpeted “meaningful progress on sustainability goals focusing on environmental, safety, labor and community impact performance” across its fleet of over a hundred ships. The review observes that its chief executive, Arnold Donald, received £22m in 2016 (from £6m in 2015) – although the illegal activity did take place just prior to him taking over as CEO.

 

In a league of their own?

The biggest beast in the listed UK company pay jungle is Sir Martin Sorrell, chief executive of WPP (WPP). In 2016, he received a performance-based £48m as predicted (2015: £70m, see 'How much is too much?', 27 May 2016). And this is where Neymar comes in, for talented as he may be, his pay is higher: a guaranteed £40m a year before tax, according to the BBC, from Paris St-Germain plus a reported £17m from sponsorship. 

Proof, as though any were needed, that society values professional football more than the largest hundred UK companies on which collectively a mere 4.3m jobs directly depend. Football has so far avoided the gradual tightening of corporate governance that listed UK companies have experienced ('Lessons from History', 22 May 2017). And it shows:

  • The reason that Neymar’s transfer fee was so high is that he was bound by a five-year contract with FC Barcelona. The “transfer fee” of €222m paid by Qatari-owned Paris St-Germain is technically the agreed compensation for breaking it.  British company corporate governance restricts executives to one-year contracts.
  • Neymar was reputed to have received €8.5m when he signed to Barcelona. Golden hellos are largely banned in UK companies – they are normally restricted to buying out shares awarded by previous employers.
  • Agent and 'advisory' fees are a murky area in football. Companies and executives have been charged – like Barclays (BARC) for the advisory service agreements made with Qatari investors in 2008.

It was US Supreme Court Justice Louis D Brandeis who pronounced in 1913: "Publicity is justly commended as a remedy for social and industrial diseases. Sunlight is said to be the best of disinfectants; electric light the most efficient policeman." 

We are kept in the dark about global talent markets like professional sports including football, celebrities of various kinds, fund managers or private equity. Their pay often exceeds that of company chief executives but it is normally kept under wraps and under the public radar. Meanwhile, listed UK companies stand exposed in the light. Having to disclose their pay keeps them under constant public pressure.

The High Pay Centre justly campaigns against the gulf between the highest disclosed pay and normal pay in the UK. In that context, high pay seems unfair. But so is pay in the wider world.