Shakespeare’s green-eyed monster is stalking the biggest UK and European public companies. Top executives look across the Atlantic and see their American counterparts take home ever larger pay packages, and they are frankly jealous.
Some of it is about sheer size: the biggest US companies have revenues and profits that most European groups can only dream of. But there is a strong cultural element too. When consultants at Deloitte recently compared chief executive pay at similar-sized companies, they found that UK and western European companies were in the same ballpark but US median pay was substantially higher.
Old World companies worry about shareholder revolts when their pay packages approach £10mn; yet there was little pushback last year when the 10 best paid US chief executives all made more than $40mn. This gulf in attitude has been widened in the UK by the weaker pound, which has never fully recovered from its plunge after the 2016 Brexit vote. UK executive salaries are now that much smaller in dollar terms.
Big pay packages can exacerbate inequality and stoke populist resentment, but global companies have to compete for talent in the real world, not some idealised society. This isn’t just about CEOs being greedy. Holding down top pay compresses remuneration lower down, sending ambitious people elsewhere. The UK is struggling with high turnover among chief financial officers and can ill-afford for the problem to spread.
Concerns about pay’s effect on competitiveness have crystallised at groups that have large US divisions or go head to head with rivals there. Medical device maker Smith & Nephew lost then-chief executive Namal Nawana in 2019 because he wanted more pay, and has run through four CEOs in five years. Its board is now asking investors to approve boosting the packages of its US-based executives, including CEO Deepak Nath, who would see his maximum payout rise nearly 30 per cent to $11.79mn.
They are not alone: Spanish bank Santander and UK-listed drugmaker AstraZeneca recently faced down shareholder rebellions to raise pay for top executives, and London Stock Exchange Group’s 76 per cent increase for its CEO is up for a vote next week.
So far this year, nine of the 16 FTSE 100 companies that have proposed new pay policies are seeking substantial increases, up from four of 29 last year, according to Deloitte’s research. “Boards have become braver, recognising that this is the right thing to do,” says partner Mitul Shah.
I wouldn’t go quite that far, but Smith & Nephew chair Rupert Soames has a point when he says that the UK’s historic high-minded attitude on high pay “is not actually sustainable”.
But if UK and European companies are going to pay more, they need to be smart about it. Tying pay to performance is a given, but the mechanisms must be carefully thought through. As the banking sector learnt to its cost in the 2008 crisis, the lure of a big payday can prompt tunnel vision and outright misbehaviour, leading to decisions that boost short-term returns while storing up trouble for later.
Regulators now force banks to spread incentive payouts over multiple years and write employment contracts that allow them to take back pay or withhold deferred bonuses if losses mount in the out years.
Many other companies claim their long-term incentive plans include such clawback and “malus” clauses. But it is not clear they really work. Rio Tinto stripped former chief executive Jean-Sébastien Jacques of £2.7mn in bonuses in 2020 after forcing him out over the destruction of a sacred Aboriginal site. But his pay still rose 20 per cent for the year because the board concluded it could not legally withhold more.
There are also rising concerns about pay plans that include sustainability and diversity metrics as well as financial goals. While ostensibly laudable in intent, they can be, in the words of one big investor, “subjective, fluffy and easily gamed”. That is contributing to greater scepticism in the US over eye-watering pay. Last year, the number of American companies where a substantial number of shareholders opposed the remuneration plan was still small, but it jumped by 40 per cent.
Company executives salivating over the potential for US-style pay for performance should also be expected to deliver the goods. That may well be harder for companies that lack the tailwind of an American economy that continues to surprise with its resilience. It’s one thing to pay up for superior results. Rewarding mediocrity is something else entirely.
brooke.masters@ft.com
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