After years of debate on the excessive salaries of executives, a new tool has been created that makes it easier for investors and stakeholders to scrutinise the pay practices of some of the UK’s biggest companies.
The Fair Reward Framework (FRF) was launched in September to help investors assess the pay policies and practices of the UK’s largest public companies. The tool has been developed by a group of asset owners, including the Church of England Pensions Board, Brunel Pension Partnership, People’s Partnership and Scottish Widows, in collaboration with think-tank the High Pay Centre.
Using publicly available data, the framework details pay outcomes across different companies, including executive salary levels, CEO-to-worker pay ratios and the gender pay gap. It also reveals how businesses divide the wealth they accumulate, for example their living wage and tax reporting credentials, the extent of their engagement with trade unions and worker representation at board level.
“While the dashboard doesn’t allocate scores to companies on their performance, it will enable an understanding of gaps in performance relative to peers,” says Vaishnavi Ravishankar, head of stewardship at Brunel Pension Partnership. “It is a one-stop shop that provides data points on inter-related issues that often get assessed in isolation.”
The tool currently covers two-thirds of the FTSE 100, based on data from the 2022 and 2023 financial years, with further company assessments to be added over the coming months. A pay assessment for the entire FTSE 100 will be published by early 2025.
Reframing the debate on executive pay
The tool was developed in response to the ongoing issues surrounding remuneration for executives and the fairness of the processes behind it.
“Conversations about pay in the investment community and outside are highly polarised,” Ravishankar says. “We wanted to create a tool that will enable investors to have thoughtful conversations with companies about corporate reward practices and how they are generated, as well as distributing value across shareholders, employees and society.”
This comes amid calls for higher pay for CEOs in the UK. Both the London Stock Exchange and investment bank Schroders recently argued that bosses should be better rewarded to compete with higher compensation executives typically receive in the US.
In 2022, FTSE 100 CEOs earned an average of £4.3m. Last year, this figure increased to £5m, which is 109 times more than the average worker, according to analysis by the High Pay Centre.
Despite their increasing pay packages, there is now strong evidence that shows executive pay is not linked to performance. Even the highest paid bosses have failed to deliver for shareholders in recent years, which is challenging the justification for their substantial salaries.
For example, Abrdn’s share price has decreased by 23% in the past year, despite the fact that its former CFO – now chief executive – was paid double that of the average FTSE 250 finance chief. Similarly, the CEO of Schroders received an average pay of £6.2m and yet the company has continued to underperform on the stock market.
This is causing concern for investors. Earlier this year, in a letter which was sent to FTSE 350 companies’ remuneration committee chairs, the Investment Association (IA) emphasised the need for clearer alignment between pay and performance. The FRF is intended to help provide that.
What does the Fair Reward Framework mean for businesses?
Corporate pay policies have always been assessed by investors, given its role as a key indicator of governance. Going forward, however, Ravishankar says the data from the framework will be used to “amplify” their engagement on this issue.
Finance chiefs, who have a critical role in framing the financial impacts of any compensation plans, will have to ensure they are prepared. Ravishankar says CFOs will have to be more explicit about the connections between CEO reward, governance quality and employment conditions in their corporate engagement.
The tool will also be an additional source for voting decisions, Ravishankar says. “We would like to see engagements and voting decisions on pay quantum to be anchored to employee pay, working conditions and other factors that demonstrate alignment with employees and stakeholder expectations, not just to peer rankings.”
Remuneration is key to retaining and motivating critical senior executive talent but, as it continues to be scrutinised by major investors and stakeholders, businesses may have to re-examine their existing compensation plans.
The framework also includes an indicator on employee share ownership, which could encourage greater reporting on initiatives like this that allow workers to share in the company’s success.
Ravishankar hopes more investors will use the FRF data to engage with the companies they invest in and give credit to those that are moving towards fairer reward practices.
Demand for fairer reward practices grows
Social epidemiologists have argued that larger income gaps are detrimental to society, and it appears the financial industry has started to recognise this too. There is now a greater emphasis on financial practices that promote fairer societies and economies.
A new taskforce was launched on 27 September to develop a framework for companies to identify and assess social-related impacts. The Taskforce on Inequality and Social-related Financial Disclosures (TISFD) aims to address social inequality and will operate in a similar way to the Task Force on Climate-Related Financial Disclosures.
Proponents claim that companies that integrate social factors and inequalities into their decision-making are better equipped to attract and retain workers, increase innovation and productivity and maintain strong relationships with communities and consumers
“This reference to inequality is really important,” says Regina Lau, CFO at fintech Weavr. “This is an area that has been traditionally overlooked by businesses due to a lack of metrics for assessing risk and impacts on people and communities.”
She believes that the framework proposed by the taskforce provides a “great starting point” for businesses to begin calculating the potential benefits of social-related initiatives.
Alongside the Fair Rewards Framework, it is yet another sign that the investment community is looking at social-related issues more closely, adds Lau. Businesses and their finance chiefs should take note.
