Executive Rewards: paying for success

Executive Rewards: paying for success

Some of the biggest British companies have been asked by the officials to justify the extensive pay gap between the executives and their companies’ staff. This is part of the rules that came into force with the Executive Rewards report. The Executive Rewards report examines the Government’s efforts to address the issue of the pay gap between chief executives and employees as it states: 

“Over the last decade, chief executives’ earnings in the FTSE 100 have increased four times as much as national average earnings. FTSE 100 chief executives earn around £4 million per annum while average pay is under £30,000. These huge differentials have been baked into the pay system, in part by a heavy reliance on over-generous, incentive-based pay and partly by the weakness of remuneration committees which design ever more complicated and opaque pay packages for their peers” (Commons, 2019). 

One leading explanation for this significant gap in pay is that in a globalised and open economy there is an increase in multinational companies. This means that the companies have to pay huge amount of money for attracting top and limited talent.

In the majority of large companies, roughly 20 percent of top executives are foreign nations. This figure doubles in the UK where top executives make up to 40 percent reflecting the cutthroat competition for acquiring talent. However, this is not the sole cause for high salaries. According to Nichols, executive pay is more likely to be linked to company profitability and firms have reported a high level of profitability. 

These large executive salaries haven’t escaped their fair share of criticism or rebellion. Persimmon, a British housebuilder company asked Jeff Fairburn, its chief executive to leave after outrage over his £75 million bonus. A further 64 percent of the shareholders revolted against the company’s remuneration policy and pay package too. In the case of Royal Mail, Rick Back, its new Chief Executive requested £5.8 million to buy him out of his previous contract with GLS.

The UK Government has ordered companies to publish pay ratios between employees and executives. The new Regulations have established that companies with more than 250 employees will be liable for explaining and publishing the total annual remuneration of their CEOs. The current ratio of chief executives to employees stands at 80:1. However, the large differences in pay are concerning. The massive difference in the pay differentials is primarily down to two reasons: incentive-based pay and the inadequacy of the remuneration committees. To improve transparency in the executive remuneration, pay-ratio regulations must be applied effectively. There have been numerous investor revolts back in 2018 over the high remuneration of chief executives of companies such as Unilever, Royal Mail, and Persimmon

The significant change the Executive Remuneration report will incur includes a heightened level of transparency and disclosures for payment of employees and executives in 2020. This will involve detail regarding how the salaries, as well as bonuses, are given in companies. MPs have strictly condemned the practice of Persimmon for not giving its lowest-paid staff the minimum living wage. Furthermore, Royal Mail had one of the most significant revolts by its shareholders in the history of the corporate sector in the UK in July when seventy percent of the shareholders voted against the pay policy of the company for the remuneration of chief executives.

It is yet to be seen whether this increased level of transparency will make a difference. However, if the Gender reporting is anything to go by then we’re likely to see a spate of stories about the pay gap ‘horrors’. Maybe it’s this public shaming which will force change. 

About the Author
Anna Pierz