When Julia Hoggett, head of the London Stock Exchange, asks a “big tent” conversation. for a fee, with a large, constructive aspect. if the UK market has to rethink how to remunerate top executives, I only think of a circus.
This debate has become something of a three-track show. Tthe complaint is that British investors’ attitudes towards payments prevent companies from attracting the best people. Investors are responding to pressure from customers and government policy, through “tell-on-pay” votes at shareholder meetings and calls for disclosure of wage relationships between bosses and workers. There is no big enough marquee to convince the general person or politician that an average paycheck of £4.3m in the FTSE 100 is the root cause of what is holding the country back.
US wages appear to have moved on in recent years. But that’s partly because pay is generally related to company size, and the US is a bigger market and a wealthier country. According to Xavier Baeten of Vlerick Business School, executive pay in the UK is still favorable compared to Europe, although this is more true for the average CEO than the best. In the interest of being constructive, what discussion might usefully take place in Hoggett’s tent?
First, it may be outside the realm of anecdote. “Surprisingly, there is no readily available database that allows for consistent comparisons of CEO pay across different countries, fully taking into account factors such as company size, level of risk in the pay package, and significant differences in tax and pension systems premises,” said Tom Gosling of the London Business School. While we’re at it, how much influence do proxy companies really have in determining how shareholders vote? Estimates of the percentage of votes they influence range from 10 to 40%. Complaints about pay are long-standing, so how and where is this a real hiring issue now?
Second, is there really a one-size-fits-all solution? Some UK listed companies do indeed play a global market for top hires, but many don’t.
Take educational group Pearson, which had 46% of investors last week vote against its salary policy for American boss Andy Bird who came from Disney. Most of its operations and employees are located in the United States, the company and the shares are (finally) doing well. But chief executives objected to the policy based on UK comparisons and ‘quantum’, while similar sums are thought to apply in the US to smaller competitors. Hoggett’s complaint about double standards is reasonable. Does addressing this issue inevitably translate into higher pay for the entire market?
Third, there seems to be a problem with a tortuous process and not just the resulting numbers. Everyone complains that payroll takes too long and dominates the interactions between companies and their investors.
This is partly because investors want to showcase how they work. It owes something to a – somewhat justified – lack of faith that boards of directors will push back dominant bosses. It could also be because the typical UK pay model is complex and unsuitable for the company in question. Efforts to offer simpler alternatives or more flexibility, such as through the use of limited stocks, have not gone far.
Fourth, the asset management industry has to deal with its own divisions. The idea of an industry divided between fund managers and governance fanatics may be exaggerated: research from the London Business School found that the proportion of portfolio managers and governance experts who felt pay was too high was remarkably similar, both above 70%. But there’s obvious hard feelings and furious debate within the industry about how it handles wage issues, a boil that probably needs to prick.
Fifth, does the afterthought pay ring with the ‘scarce and hungry’ market that Hoggett herself wants London to become? Boards should support unusual packages and accept investor dissent on the chin. Executives should earn their way to success numbers on the heels of success, not the promise of it. Both happened with Pascal Soriot at AstraZeneca — successfully, according to the president this week. Higher pay for slow performance doesn’t fit an entrepreneurial, rookie image.
The pay debate is a high-level act, which risks entrenching division within the City and causing a backlash outside. Kudos to Hoggett for accepting it. He’d do well to avoid a clown show.
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