The High Pay Center’s latest report on FTSE 100 CEO pay packages opens with: “10% pay rise? That’ll do nicely. Our annual survey of FTSE100 CEO pay packages shows no end to the rise and rise in top pay.” Its main findings show that the average FTSE 100 CEO pay package was £5.48 million in 2015, up from £4.96 million in 2014. The report quotes Stefan Stern, Director of the High Pay Centre, saying: “There is apparently no end yet in sight to the rise and rise of FTSE 100 CEO pay packages. In spite of the occasional flurry from more active shareholders, boards continue to award ever larger amounts of pay to their most senior executives.” As well as the Centre’s concerns about absolute pay levels, Stern welcomed a number of May’s proposals, specifically the publication of the ratio between the CEO’s pay and that of the average employee, and the placement of a worker representative on the board, both of which he feels may have a restraining influence. The report notes that only one FTSE 100 company has employee representatives on the board. That company is travel and tourism firm TUI, which recently merged with German company TUI AG, has an airline pilot and a travel agent on its supervisory board.

“10% pay rise? That’ll do nicely. Our annual survey of FTSE100 CEO pay packages shows no end to the rise and rise in top pay.”

The High Pay Center


Other findings include an estimate of the average pay ratio at 147:1, and the fact that only a quarter of FTSE 100 companies “are accredited by the Living Wage Foundation for paying the living wage to all their U.K.-based staff.” What that means for their overseas workers would likely be even bleaker. The report also found that most FTSE 100 companies do not disclose how many people they employ in the U.K. in their annual reports. Only 22 companies out of a sample of 72 did so. Most of the top 10 highest paid CEOs came from the finance sector, with some exceptions being the £70.4 million in highest place earned by WPP’s Sir Martin Sorrell, pharmaceutical group Reckitt Benckiser’s Rakesh Kapoor at £23.2 million and Sky’s Jeremy Darroch at £16.9 million. Even with the current exchange rate, these look more like US CEO pay levels. There were no female CEOs in the top 10.

The report attracted some immediate criticism from Tim Worstall writing in Forbes, who noted that it is ridiculous to compare CEO pay of these companies with U.K. employee pay since few even have any operations in the U.K.. Indeed, it is true that the FTSE 100 is much more like the English Premier League than the old First Division; littered with talented foreigners. But in fact, the report already notes this. Directors from 39 percent of FTSE 100 companies, the report says, “were signatories to a public letter supporting Remain ahead of the Brexit vote. Of the companies which disclosed the number of U.K. employees, 16 out of 22 employed a majority of their employees outside the U.K.”

“This is why we need better disclosure/more ‘granularity’ about pay, so we can make more useful/intelligent comparisons.”

Stefan Stern, Director, High Pay Centre


Stern said in an e-mail to Compliance Week: “Tim goes a little far, but in fact he makes an interesting point about comparability. This is why we need better disclosure/more ‘granularity’ about pay, so we can make more useful/intelligent comparisons. He breezes over the point that FTSE 100 companies are listed here, usually headquartered here, and are symbolically ‘British,’ even if revenue comes from all over the world and the workforce is spread widely. Some people use globalisation as an excuse to uproot companies and claim that they do not really exist meaningfully anywhere—this is the sort of thinking that leads to tax base erosion.” Stern continued: “I sympathise with Richard Murphy's [outspoken tax researcher at City University] arguments about making businesses produce real national accounts of their activity, making it harder to hide revenue. It also grounds the businesses in the reality of the markets they operate in.”

A few days later the Executive Remuneration Working Group issued its final recommendations that it hopes will mitigate some of the criticism of high CEO pay and the widening gap between it and worker pay. It too has several recommendations in line with Theresa May’s comments on governance and pay. There are 10 recommendations (see box to the right).


Below are 10 recommendations form the Executive Remuneration Working Group regarding high CEO pay.
More flexibility for remuneration committees to choose the most appropriate pay structure
Non-executive directors should serve on the rem com for at least a year before becoming chairman of the committee
The company chairman and the full board should be fully engaged in the pay setting process
Rem coms should not be overly reliant on their advisers and should but this contract out to tender regularly
Shareholder engagement on pay should focus on strategic alignment and should incorporate investment and governance reviews
Engagement should focus on understanding investors’ views and any disagreements they have
Rem coms should disclose the target setting process and retrospectively disclose target ranges
Discretion should be fully disclosed as well as the effect of discretion on remuneration outcomes
Maximum pay potential should be justified using internal and external relativities, including a pay ratio between the CEO and median employee
The inflationary impact of market data should be guarded against
Source: Executive Remuneration Working Group

The group considered a binding vote on pay but rejected it as it had not had time to consider its full implications. Noting May’s commitment to it, however, it said: “There are a number of approaches which the Government could consider if it chooses to pursue additional binding votes on remuneration … for example, focusing binding votes on those companies that have failed to receive support from 75% of shareholders on the remuneration report in the previous year.”

In general, as in the interim report, the final report focuses on flexibility and restoring trust. Flexibility is focused on trying to move companies away from the one-size-fits-all, 3-year performance measurement long-term incentive plan that has become the plan of choice for most U.K. companies. In addition, the uncertain outcome of LTIPs and the various clawback arrangements have led executives to discount the value of this form of pay which has led to increases in pay to take account of this.

Unfortunately, the group’s call for diversification of remuneration structures fails from a lack of imagination. The forms proposed—the standard LTIP, deferred shares, restricted shares—are already in existence and heavily used, so nothing new is proposed. “Performance shares on grant”, where shares were awarded retrospectively based on prior performance, the only new idea, has been dropped and stock options were disfavoured from the start.

Again unfortunately, the Group undermines its own calls for flexibility by being prescriptive about a number of other elements of pay. It recommends a discount rate of 50 percent for restricted shares, a three-year performance period followed by two-year holding period for LTIPs, and a 500 percent of salary shareholding guideline (though smaller for smaller companies), with the requirement that executives retain up to 50 percent of the post-tax vesting amount until the guideline holding level has been achieved. Surely all of these are dependent on “how a business works” and should not be prescribed.

But none of the much-vaunted flexibility will occur without the necessary trust being built between remuneration committees and shareholders, and that is the basic focus of the nine other recommendations. A clear example of this trust building is discretion, where the Group advises that shareholders are much more likely to trust a remuneration committee if it applies upward discretion in awarding bonuses if it also has a track record of applying negative discretion if unforeseen, external events trigger a bonus award unjustified by internal performance.

Lack of experience of remuneration committee members and chairs is also a focus. Unlike for the audit committee chair there is no “recent and relevant experience criteria” for choosing a candidate for the remuneration committee chair. So the Working Group also recommends that the Financial Reporting Council (FRC) updates the U.K. Corporate Governance Code to require a more experienced remuneration committee chairman.

“More flexibility should lead to simpler remuneration structures and more certain outcomes for executives and therefore less discounting of the remuneration received. This should then lead to a reduction in overall remuneration levels.”

Executive Remuneration Working Group

There are also concerns from companies about over reliance on the advice of proxy advisors and that sometimes different messages about remuneration are received from investment managers and governance teams within the same investment house. Aligning incentives with strategy should mitigate the dysfunction here, says the report.

In retrospect, the requirement to disclose actual annual bonus targets, again an issue of trust, is similar to May’s proposals. The disclosure of the pay ratio between the CEO and median employee also aligns with May’s suggestions. And May’s comments about overly complex pay structures are also echoed in the Group’s note that “more flexibility should lead to simpler remuneration structures and more certain outcomes for executives and therefore less discounting of the remuneration received. This should then lead to a reduction in overall remuneration levels.” That reduction is also part of May’s concerns.

Clearly, dampening concerns about executive pay is not a simple exercise. While there are many good points in the Working Group’s paper—recommendations two through 10 will all help build the much needed trust not only between shareholders and companies, but between regulators, the public and companies—and its plea for flexibility is laudable, the solutions to that flexibility cannot be found in the paper’s proposals. These should be much more far-reaching and should involve a rigourous examination of all elements of the pay package, not just LTIPs.

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