Annual reports reveal what the UK’s top executives earn, but present little evidence to justify their share in success
Executive pay: Taking steps to redress the balance
As new research from the CIPD shines a light on multi-million-pound executive pay packages, reforms are needed to more clearly link pay to sustainable performance.
A report published today by the CIPD and the High Pay Centre, examining executive pay across the FTSE 100, has revealed that the UK’s largest publicly listed companies paid their top leaders, known as Key Management Personnel, a total of at least £2.08 billion in 2018. It also highlighted that the average (median) FTSE 100 CEO earns 117 times more than the average UK worker. In other words, it takes the average worker one year to earn what a FTSE 100 CEO earns in just three working days.
The report also highlights concerns around corporate reporting on pay and performance for key management personnel, which it found to be inconsistent and lacking transparency.
Executive pay is often disconnected from the reward strategy of the wider organisation – and therefore HR teams. But there are steps that people professionals can take to think about this issue in a more holistic context and address pay inequality.
What is the impact of pay disparity?
The gap between executive pay and the rest of the workforce is damaging to individual businesses and society. So, it’s firmly on the UK Government’s radar. From April next year, regulations around executive remuneration transparency come into play, with large listed companies having to disclose and explain the gap between CEO pay and that of their average employee.
Executive pay is meant to incentivise and reward longer term performance, and yet evidence suggests a disconnect between CEO pay and performance. There are some assumptions that should be challenged. Using shareholder returns as the only measure of success is a blunt metric given rises in the share price are often tied to wider economic factors, and nothing to do with leadership performance. For example, the CEO of house builder Persimmon, Jeff Fairburn, was the highest paid in the FTSE 100 in 2018 and 2017, but his pay package was linked to a share price spike due to the announcement of the Government’s Help to Buy scheme.
Incoming pay ratio reporting will increase public, media and shareholder scrutiny of executive remuneration, and may prove a reputational risk for companies. The amount of time and energy spent on setting and then defending the pay packages of top earners is taking attention away from areas of strategic importance. A recent report from Nesta even found that executive pay systems were discouraging innovation, due to being overly focused on short-term financial measures. Could some of that bonus package be reinvested in R&D or training for the rest of the workforce? Ignoring this opportunity cost could hinder productivity as well as make it difficult for employers to increase the earning potential of their lower paid staff.
Income inequality contributes to mistrust in business. According to the 2019 Edelman Trust Barometer, only 43% of the general population in the UK say they trust CEOs. The same survey has also found that more than half (52%) of people say that the way business works today is not good for society; when asked what needs to change, 62% said addressing the high pay and bonuses given to senior management and business leaders was important or very important.
This disparity risks impacting engagement and workforce productivity. After all, success is a collective endeavour.
Executive pay is a complex and emotive issue. The CIPD and High Pay Centre are recommending three potential solutions:
1. Reform how executive pay is defined
The impact an organisation has on the environment, society and its people should be taken into account when setting executive pay, with a greater emphasis on non-financial measures of performance. Financial metrics are only one measure of success. If CEOs are rewarded more based on their success in improving diversity, employee well-being and people development, these critical issues, which sit at the heart of sustainable business performance, will become more of a priority. The extended focus of the Corporate Governance Code into culture also means executive remuneration must be linked to both financial and non-financial measures of performance. CEO pay packages should be simplified so they are based on fewer but more meaningful measures of performance and success.
2. Report transparently on top team pay beyond the CEO
While disclosure of CEO pay has improved the quality of debate around inequality and corporate governance, pay for ‘key management personnel’ beyond the CEO is a better indicator of the share of company resources captured by top earners. Disclosure on this is inconsistent. We recommend more guidance on reporting at this level, and for the top 1% of earners, to ensure greater consistency. Simplified pay packages will help to reduce the time spent reporting.
3. Broaden the role of Remuneration Committees into a ‘people and culture committee’
The remit of the Remuneration Committee (RemCo) should be broadened to also consider organisational culture, reward across the whole workforce, and executive capability and succession planning. Companies could consider a formal ‘people and culture committee’ in place of the RemCo and ensure that those siting on committee have relevant expertise in people and reward strategy. Annual reports should demonstrate clearly how executive remuneration relates to the organisation’s people strategy and culture.
The role of the people profession
Many HR teams do not get a deciding vote on executive pay – particularly in publicly listed firms where pay is set by RemCos – but the people profession still has a vital role to play in all large organisations, including those in the public and voluntary sectors, by…
- Taking a whole ‘systems thinking’ approach to reward, using data and looking for areas of dissonance that could cause employee dissatisfaction or pose a reputational risk to the organisation. If your organisation is not paying the Living Wage (including to contractors) or if lower paid staff are being driven to use payday loans, how does this sit with executive pay?
- Think about how pay links to performance across the workforce, using evidence-based strategies and leveraging behavioural science and non-financial measures of success, such as D&I targets, to drive the desired behaviours.
- Focus on improving productivity and performance throughout the workforce to help increase the earning potential of your lowest-paid staff.
- Build your bench. Focus on succession planning and building a strong pipeline of diverse talent who will be ready to step up into executive leadership positions. Research from consultancy Pearl Meyer has shown CEOs promoted from within are paid 20% less than those hired externally.
- Get your data ready for pay ratio reporting now and think about the narrative around this figure. What impact will that have internally and externally? Could it negatively impact on employer brand and reputation?
- Improve your reward skills and brush up on the evidence on executive pay. This can be an area of weakness for many people professionals, but it is a key area for leaders and improves HR credibility. By challenging some of the assumptions around what drives performance, HR teams can play a crucial role in closing the pay gap.
- Get involved in RemCos, either in executive positions by working closely with the chair, or by considering how you can contribute as a non-executive director.
The CIPD and the High Pay Centre will be conducting further research on FTSE 100 remuneration reports to uncover the extent to which non-financial measures of performance are currently used to determine executive pay. This will help to inform the CIPD’s recommendations around how CEO pay should be defined.
The CIPD will also continue to push for RemCo reform and the broadening of the RemCo into a ‘people and culture committee’, as recommended in our recent report.
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