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Simmering pressures

Given that the UK average salary is around £30,000 a year, if there was a pay cap for chief executives, what should it be? To answer that, most of us would probably come up with a rounded multiple of either the national average or our own income. So it should have been no surprise when Survation, a market research agency, asked this question of 1,005 UK adults and about a third suggested £100,000. A quarter said £200,000, and another quarter answered “don’t know”. But that could be (assuming that answers were steered by a multiple-choice format) because £1m was the maximum offered, which about a tenth selected

This question was prefaced by another: “To create a fairer economy during the Covid recession, it has been argued that a maximum wage should be put in place to create new jobs and to spread money more evenly across the economy. Other people argue that a limit on high earners’ salaries would reduce incentives on productivity. Would you support a maximum wage?” 54 per cent said “yes”, 29 per cent said “no” and 17 per cent said “don’t know”.

The survey was used by the High Pay Centre and Autonomy, both think tanks, to indicate widespread public support for the concept of redistributing pay. Their study, published earlier this month, argues that mass lay-offs would not be necessary if the highest paid earned less. They suggest that a cap of £187,000, which would cut the pay of just the top 0.6 per cent, could finance a minimum wage of £10.50 an hour and provide pay rises for 3m workers. You can find their interactive models, which can be played with to demonstrate the impact both overall and on different sectors of the economy, at

Pre-pandemic, this study would have been thought of as highly political, whereas now this type of argument is entering the mainstream. The pay cap concept relies on a number of assumptions, such that companies are static organisations. In reality, they face constantly changing pressures, and the right calibre of senior executive can make a considerable difference. Pay is hardly a nil-sum game. Pay cuts tend to have an enduring demotivating drag on operational efficiency, while motivation from pay rises soon fades. And then there are the relative challenges of different job sizes. Forty years ago, many companies were using Hay methodology, which quantified the size of knowledge jobs in terms of knowhow, problem solving and accountability. However, attempts to make pay fair by tying it to Hay scores foundered. Over time, some skills became more in demand, and pay had to be increased selectively to avoid losing key people.  


The pay triangle

Three factors drive pay. One is internal relativities, which the study concentrates on. External relativities also matter: pay people less and they’ll leave to join other companies that pay more. If one country required its companies to limit pay, those prepared to relocate might seek employment abroad, assuming that opportunities still exist in a pandemic world. That touches on the third factor: individuals’ perceptions of what they think they’re worth, and what they can realistically expect to be paid. The two are not necessarily the same.

We have a reasonable idea of how this works for executive directors because since 2013 companies have had to publish how they pay them. The High Pay Centre and CIPD (the professional body for Human Resources) compiles this data from FTSE 100 companies, and in their 2020 review, based on 2019 annual reports, the lowest-paid chief executive received £413,724. He was David Stevens at Admiral (ADM). It would be a big ask to halve his pay to the sort of level that the Autonomy report envisaged – let alone that of other chief executives, all of whom received significantly more.

The reason that Mr Stevens receives so little (relatively speaking) is that he only takes a salary and benefits. Most FTSE 100 chief executives also receive a bonus worth about the same as their salary, plus a share award worth about twice as much – in other words, three-quarters of what they receive is based on their perceived performance. Mr Stevens ducks out of these because, as one of its founders, he still owns 8.9m Admiral shares. As skin-in-the-game goes, that’s quite a stake. His dividend in 2019 would have been worth over £30m, which raises another complication for those inclined to advocate a maximum pay cap – would it extend to wealth and to “unearned” income as well? 


Time shift complications

The median amount received by FTSE 100 chief executives in 2019 was £3.6m. This was what David Thomas, chief executive of Barratt Developments (BDEV) received – by definition, 49 FTSE 100 chief executives received more than him and 49 received less (this adds up to 99 companies because pay data is not publicly available for one FTSE 100 constituent, Scottish Mortgage Investment Trust). 

This median is down slightly from previous years, and the High Pay Centre says that it’s the lowest since 2011. According to Deloitte, that’s largely because remuneration committees have become more assertive over the past five years in cutting back on formulaic bonuses, and as a result, bonuses (which are tied to executives’ annual performance) have gradually declined. In 2019, chief executives typically received 68 per cent of the maximum bonus they could have received. This compares with 78 per cent in 2015. Bonuses normally go up with salaries, so in absolute terms pay rises partially offset this. 

The other half of a typical FTSE 100 chief executive’s pay comes from long-term share awards. Most are made annually, and outcomes depend on performance over the following three years. This time shift creates complications. Those stated as remuneration in 2019 would have been awarded in 2017, and the proportion of shares released was about 63 per cent of those originally awarded. Because of the timing of annual reports, their value would have been estimated early in 2020, and expressed in terms of cash, but what the executives actually receive is not cash but shares in their company, which normally can’t be sold for another two years. What that means is that the actual value to executives continues to be hostage to the share price and, in reality, could go up or down considerably.

Drawing conclusions from annual data is further complicated when companies make awards every five years. That was how Tim Steiner at Ocado (OCDO) received £58.7m in 2019 after receiving a twentieth of that in previous years (this was discussed in 'Ocado: Rollercoaster to riches', IC, 20 August 2020). It also explains why Dave Jenkinson at Persimmon (PSN) was reported to have received £39.0m in 2018, but £673,000 in 2019. And why Simon Peckham at Melrose Industries (MRO) received £42.8m in 2017, but £976,000 in 2019. 


Pay inequality within the FTSE 100

This time difference can make it misleading to assume that the amounts received in 2019 necessarily reflect trends in pay awards made in 2020 since much of this data will be tied to decisions taken two or three years ago.

Another common misconception is that high pay is evenly distributed. In fact, it’s just the opposite. There are massive differences: in 2019, the 10 highest-paid FTSE 100 chief executives received almost 20 times as much as the 10 lowest. The executive who received the 20th largest amount (Jess Staley at Barclays (BARC)) received £6m, three times as much as the executive ranked 80th (Chris Grigg at British Land (BLND)). And the bottom eight each received less than £1m.

Year-to-year comparisons of the amounts received by individuals are hampered by changes of incumbent and the constituents of the FTSE 100. Within the 58 companies that, over the past three years, have remained in the FTSE 100 and have retained the same chief executive, only eight have received amounts that have varied by less than 10 per cent from the year before. Pay for the other 50 fluctuated more, which is what you’d expect for pay linked to performance.


Downward pressures

Prior to the pandemic, there was some evidence that chief executive pay was beginning to head slightly downwards. Excluding the big fluctuations in Ocado and Persimmon, the data suggests that about half the chief executives each received on average £1.89m less in 2019 than in 2018, while the average for the other half was £1.06m more. The gap between executive and employee pay looks to be narrowing slightly, although it remains large, with the median at about 69:1, based on CIPD calculations. 

The impact of shutting down swathes of the economy appears to have accelerated this trend. Deloitte says that more than half of FTSE 100 companies responded by announcing pay cuts, typically in the form of a 20 per cent cut to salaries, although many were temporary. Longer lasting cuts would increase the proportion of total remuneration that chief executives receive as shares, which makes their ultimate pay more uncertain for them. In the current climate, they might well fear that they’ll lose value over time. Sentiment is against them. Already, whenever share prices go up during the performance periods of share awards, the gains are reported as pay, which for some, reinforces the perceived sense of social inequality. According to Stephen Cahill, a vice chairman at Deloitte: “Many remuneration committees face a tough year ahead and will be expected to use judgement and discretion to ensure that executive pay reflects the wider investor and workforce experience. A careful balance is needed to attract and incentivise the leadership required to drive UK business recovery in the context of a growing focus on building back a fairer society.”     

So while it’s true that the Autonomy survey was simplistic and begs a number of questions, it should not be ignored. It is not alone in overlooking the part that tax already plays in making pay less unequal, and it illustrates a widespread reaction to growing inequalities and social divisions caused by government responses to the pandemic. Surveys like this reflect broader perceptions about corporate excesses as the failure to level up from the bottom increases pressure to squeeze down from the top.