- Are London CEOs paid enough?
- It all depends on who you compare them with…
You could pity AstraZeneca (AZN) chief executive officer (CEO) Pascal Soriot. Despite delivering on financial targets and making progress on innovation, his 2023 pay package put him in the bottom quartile of his global pharma peers. No wonder the firm’s remuneration committee is looking to increase his total compensation, bringing Soriot closer to (though still below) the median for his global peer group.
But don’t feel too sorry for him. Soriot’s total remuneration last year was still £16.8mn, a figure the High Pay Centre think tank described as “excessive” and “unjustifiably high”. Spokesperson Andrew Speke said that Soriot has consistently been one of the highest paid CEOs in the FTSE 100, pointing out he earns around a thousand times more than a minimum wage worker and more than a hundred times more than many of his employees.
Speke added: "While effective leadership is necessary for managing a company the size of AstraZeneca, it's also fair to question whether Pascal Soriot's contribution has really been that much greater than many of his colleagues." His pay looks very stingy or incredibly generous, depending on who you compare it with.
Comparing like with like
Having the right peer group matters, especially in a world of globally mobile chief executives. At first glance, the argument for setting CEO salaries on a global level looks robust. The AstraZeneca annual report argues that given the size, complexity and global reach of the firm, FTSE 100 and European CEOs are “not appropriate" to use as a benchmark.
The issue of using the FTSE 100 as a benchmark is particularly vexing since three-quarters of earnings for members of the index are made outside of the UK (the US is the largest source, as the chart shows). So despite a common London listing, it can be hard to compare like with like, raising an argument for benchmarking executive pay to wherever revenues are generated.
But often, a ‘global peer group’ is shorthand for ‘American’. Of the 13 pharmaceutical companies AstraZeneca identifies as its peer group, eight are listed in the US, one in the UK and four elsewhere in Europe. And US salaries can be substantially higher.
A few weeks ago, David Schwimmer, head of the London Stock Exchange Group, said US pay was “in a different place” to other countries. He said if London wanted to be a global financial centre home to world-class companies, it had to "attract world-class talent”. His own pay is, incidentally, increasing 76 per cent this year. The past few years have also seen CEOs from BT (BT.), Reckitt Benckiser (RKT) and Smith & Nephew (SN.) relocate to the US for new jobs – and net more generous compensation packages in the process.
But US pay awards don’t always stack up
Typically, only a tiny proportion of an executive's total pay is a fixed salary, with the rest a combination of annual bonuses and share awards. These have been used since the 1990s, and, in theory, incentivise CEOs to make decisions in the interests of shareholders. Although this might sound like a neat piece of applied microeconomics, the reality can be far less scientific.
Last year, London Business School professor Lakshmanan Shivakumar found that US CEOs were rewarded for lucky tax windfalls, but not penalised for surprise tax losses. The effects were stronger for US firms, where pay is typically exposed to less scrutiny. Because additional compensation wasn’t due to better managerial effort, nor indicative of better future performance, he concluded that this higher pay wasn’t in the interest of shareholders.
Even more worryingly, 2023 research from Bayes (formerly Cass) Business School found that US executives with a ‘favourable’ surname can see a 4.4 per cent increase in total compensation – equivalent to $240,699. Thanks to the pull of US salaries, determining an executive’s peer group matters more than ever. But we should be cynical about bumper US pay awards.
