Change to U.K. CEO pay or regulation seen as inevitable

PwC’s latest report, called Time to Listen, is subtitled, “We need to find a way to respond to public concern about executive pay, or matters will be taken out of our hands.” It’s quite a warning, and, coming as it does on the heels of new Tory Prime Minister Theresa May’s remarks that she is going to take action, it’s a warning that should probably be heeded. In its introduction, the report says: “we believe a seachange is required in how executive pay is approached by companies and shareholders. Pay regulation is often counterproductive and we’re not convinced that more of it is the answer.”

The report draws its conclusions on the need to address income inequality from both its own research and the British Social Attitudes 32 survey, published in 2015, which showed strong agreement, even among those voting conservative, to some stark statements:

There is one law for the rich and another for the poor

Ordinary people do not get their fair share of the nation’s wealth

Management will always try to get the better of employees if it gets the chance

Big business benefits owners at the expense of workers

It attributes the failure of big business to reinforce the “remain” Brexit vote, in part, to these negative attitudes, especially among Labour and UK Independence Party voters. Additional research carried out for PwC in June this year by Opinium showed that “two-thirds of the population believe that executive pay is generally too high, over half believe it is a big problem in Britain today, and 72% said that it made them angry (our emphasis) if a CEO is being paid a lot and their company is doing badly.”

The research also shows that over 90 percent of the population believes that the median pay of a FTSE 100 CEO (around £4.5 million) is too high. Most would like to see them earn around £500,000. In addition, the average respondent to the Opinium survey felt that a 20x or less differential between CEO pay and average salaries was acceptable, meaning that the current multiple of between 150x and 200x for the FTSE 100 is well outside this acceptable range.

The report also cross-references research on attitudes to pay inequality from the Pew Research Centre (see Other Links) with actual differentials from the OECD Top Incomes database, which it sourced from Thomas Picketty’s book Capital in the 21st Century. It shows that attitudes to income inequality are actually negatively correlated with actual inequality. “Levels of concern about inequality are much higher in France, Italy, and Spain than in the US and the UK,” says the report, “despite levels of inequality being up to twice as great in those latter two countries.” Concern about inequality is being driven by problems with job security and employment opportunities, it says, rather than actual inequality.

The research from Opinium also tested potential solutions to high CEO pay, with two-fifths agreeing that there should be a cap and that shareholders should have more power, while a third supported CEOs paying back money if and when a company got into difficulties. Less than a third agreed that there should be more regulation or government oversight.

While the report does not agree wholeheartedly with any of Theresa May’s recent pronouncements, it does discuss the pros and cons of a binding shareholder vote on pay, proper disclosure of bonus targets, pay ratio disclosures, and employee representation on boards. Most interestingly, it offers potential variations that might work more effectively, such as “loss of an advisory vote required payment to be put to a binding vote until the next remuneration policy approval” and publication of a set of “fair pay principles.” As with many others, it feels that retrospective disclosure of bonus targets—something the market is moving to anyway—is a more commercially sensitive proposal. And it notes that pay ratio disclosure— which is now law in both India and the United States—was recently dropped from the EU’s Shareholder Rights Directive as well as the fact that concerns about high executive pay are higher in countries that actually have employee representation on boards.

The paper concludes that CEO pay in listed companies is probably the result of market forces operating in imperfectly. It says that the current system of shareholder votes is working but has not been given time to “bed down” and that further regulation may do more harm than good. Finally, it says: “We should in any case be more concerned about pay structures than pay levels.” But the report says that action is not simply required at the top but also at the bottom; addressing stagnating pay and employment uncertainty for ordinary workers. Especially in a period of uncertainty caused by Brexit, “companies will be judged by how they treat the most vulnerable in their workforce.”

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