Pay is back in the headlines, and not just because of public sector strikes. The High Pay Centre made a splash with its ‘high pay hour’ – 2pm on 5 January – when the annual median pay of a FTSE 100 CEO overtook that of a UK full-time worker. Using an annual figure of £3.41m, the ratio between the two was more than 100:1.
Later in January we heard from the Office for National Statistics that private sector pay rose by 7.2%, and public sector pay by 3.3%, last year. Average weekly earnings, including bonuses, reached £649, or nearly £33,800 a year. But with inflation at more than 9%, real pay fell.
It is worth putting the data in perspective. For 2020, median CEO pay fell to less than £2.5m. It has rebounded to pre-Covid levels on the back of bonuses fuelled by a recovery in financial performance. The variable elements of CEO pay make it difficult to compare with a typical worker’s wages.
Base salaries were frozen for 43% of FTSE 100 CEOs in 2020-21
While £3.41m sounds a lot, it is lower than the near £4m recorded in 2017 and well below the $18.3m gained by CEOs of S&P 500 companies in the US, according to the AFL-CIO trade union body. It is, however, above countries regarded as having more egalitarian societies.
Winds of change
Historically, investors have focused on ‘pay for performance’, mainly determined by the financial metrics that create value for shareholders. After all, the cost of top executives’ pay is not material for companies with sales in the billions and profits in the hundreds of millions.
But greater disclosure, investor votes on pay and the rise of stakeholder capitalism have triggered change. So far, this has been in the context of Covid, which not only hit company performance, and therefore bonuses, but also prompted moves to share the pain. PwC’s surveys of executive pay show that base salaries were frozen for 43% of FTSE 100 CEOs in 2020-21; last year 38% received a lower increase than the wider workforce.
Salary comparisons
See AB’s infographics on the earnings of UK finance professionals
After last year’s recovery, will any restraint persist? There are some reasons to believe it might. One is that it is still early days in the implementation of 2018 UK requirements for boards to engage with the workforce via a nominated director or advisory panel.
The cost-of-living crisis has prompted action among employers of large numbers of low-paid staff
Another is that investors are finally paying attention to the ‘quantum’. LGIM, for instance, expects remuneration committees to consider pay ratios and the ‘wider impact’ on the workforce and public perception. More specifically, it encourages bonuses to be capped.
The cost-of-living crisis, along with statutory rises in minimum wages, have prompted action among employers of large numbers of low-paid staff. J Sainsbury will raise pay for 127,000 staff from £10.25 to £11 per hour (£11.95 in London) from February, at an annual cost of £185m.
The prospect of a flattening of the pay hierarchy implies a squeeze on profit margins unless other savings are made. If companies invest in skills and automation, this will be good for some, but could leave others behind.
More philosophically: what is performance? Already ESG goals are being baked into targets. Some, such as carbon emissions, can be measured for bonus purposes. Others, such as a sustainable business model or staff welfare, should be part of the day job.
