Every annual report season, the sums paid to FTSE 100 bosses hit the headlines, with campaigners branding them “unjust” and “obscene”. Is such criticism justified?
While the rewards might seem more than adequate to most people – an average of £4.3m in annual salary including bonuses and benefits – boards would actually like to pay their CEOs much more. That’s the view of Luke Hildyard, director of the High Pay Centre, a thinktank that criticises excessive executive compensation packages.
UK-listed businesses operate under the world’s strictest remuneration standards, according to Deloitte. A company must disclose a breakdown of directors’ pay and why it was awarded, as well as the ratio between the CEO’s pay and that of its average employee.
Such transparency has prompted relative restraint on the part of boards, given the British public’s general distaste for corporate fat cats.
“We tend to focus on FTSE companies because there’s so much more data available on them,” Hildyard says. That’s “slightly problematic” when the nation’s highest-paid bosses tend to lead private businesses. Denise Coates of Betfair, for instance, was paid £263m in the year to the end of March 2022, including salary and dividend payments.
How much are FTSE CEOs paid?
Listed firms are also under pressure from many shareholders to maintain pay restraint. Berkeley Group, Compass Group, Ocado and Standard Chartered were among those that faced “significant” votes against their executive reward plans at their 2022 AGMs. More than half (58%) of Unilever’s shareholders voted against the company pay policy that could have seen outgoing CEO Alan Jope earn €5.1m (£4.5m).
No one’s going to thank boards for underpaying. The safest thing to do is to go with the crowd
As a result, FTSE 100 bosses are paid considerably less on average than their equivalents across the Atlantic. In 2021, an S&P 500 CEO raked in 2.25 times more on average (using the median), including bonuses and stock. When Laxman Narasimhan left Reckitt Benckiser for US coffee giant Starbucks last year, he increased his total potential compensation by more than 130%.
Some observers have argued that one of the factors behind the flood of British businesses choosing to list in the US is that they want to escape scrutiny over executive pay.
Boards certainly fret over losing talent to competitors. In Centrica’s latest annual report, the chair of its remuneration committee wrote: “We cannot expect to attract and retain leaders in the future if we do not meet our commitment to recognise and reward the performance and talent of our people.” It used this to justify a 413% pay rise for CEO Chris O’Shea, despite the public’s fury over rising energy bills.
To navigate this tightrope, most companies have turned to benchmarking against other FTSE-listed firms.
How companies benchmark CEO pay
“When business people are operating in an area of uncertainty such as this, they copy other people.” So says Sandy Pepper, professor of management practice at the London School of Economics and author of several books on executive compensation.
Paradoxically, this has put upward pressure on salaries. That’s because “copying tends to go one way”, he argues. If a remuneration committee sees that its CEO is underpaid, it’s likely to increase their pay, yet it would find it hard to pay them less if the opposite were true.
“Everybody pays over the odds because no one’s going to thank them for underpaying. The safest thing to do is to go with the crowd,” Pepper says.
As persistently high inflation erodes the pay of most ordinary workers in real terms, could this situation change? Several FTSE 100 bosses waived their bonuses or accepted temporary pay cuts during the Covid crisis.
But, more recently, CEOs at supermarket chains and energy companies have attracted flak for accepting large bonuses while their firms were making their customers pay ever more for their products and services.
For instance, the leader of the Liberal Democrats, Sir Ed Davey, said that it was “outrageous” that the outgoing CEO of Shell, Ben van Beurden, was awarded nearly £10m as he stepped down in early 2023.
Yet, for companies of Shell’s huge scale, such sums represent pocket change. Many would rather take a temporary reputational hit than risk losing their star performers. Meanwhile, the financial regulators are thinking about relaxing the transparency rules on executive pay to encourage more firms to list in the UK. Even bigger rewards for CEOs could be just around the corner.
What’s next for FTSE 100 pay?
While the financial benefits may be great, it takes a particular kind of character to make the personal sacrifices required to land the top job and then handle the stress it imposes.
Speaking about the demands of her role on a recent episode of BBC Radio 4’s Desert Island Discs, Amanda Blanc, CEO of Aviva, said: “I would like to say that you can have a work/life balance. But, genuinely, you live, breathe, sleep, eat it. You think about it constantly. It’s all-encompassing.”
And the job encompasses ever more by the year. These CEOs are not only the public faces of their companies; they also represent UK plc on the world stage. Then there are the soaring demands of institutional investors, which are becoming increasingly preoccupied with the need for effective environmental, social and corporate governance. More than 80 of the FTSE 100 link some percentage of their CEOs’ bonuses to the achievement of ESG targets – almost double the number that did so in 2020.
“This has always been a phenomenally challenging job and it’s not for everyone,” McGee notes. “Since Covid, the role has been demanding more resilience, learning and agility than ever.”
