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CoronavirusBonusesCIPDCompensationLatest News

Short-term executive pay cuts won’t solve high pay culture

by Jo Faragher 5 Aug 2020
by Jo Faragher 5 Aug 2020 Employees should have more of a say in executive pay and goals should focus less on individual performance
Shutterstock
Employees should have more of a say in executive pay and goals should focus less on individual performance
Shutterstock

Temporary pay cuts taken by chief executives during the coronavirus pandemic won’t solve excessive pay and bonus culture, according to research from the CIPD and the High Pay Centre.

The research – FTSE 100 CEO pay in 2019 and during the pandemic – looked at 36 companies that had taken measures to cut pay during the pandemic.

The most common approach, taken by 14 companies, was to reduce salaries at the top by 20%. CIPD and HPC described these measures as “mainly superficial or short-term”, pointing out that salary only makes up a small part of a typical FTSE 100 CEO pay package.

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Eleven companies had cancelled short-term incentive plans (STIPs) for CEOs, while two had deferred salary increases.

None had chosen to reduce long-term incentive plans (LTIP), a bonus that can make up half of a CEO’s total pay package.

For the 2019 financial year, FTSE 100 CEOs received a median pay package worth £3.61 million, 119 times greater than the median earnings of a UK full-time worker (£30,353). This was a 0.5% decrease on the median CEO salary the year before.

Most companies continued to pay out performance related pay – 88 out of the FTSE 100 paid their CEO an annual bonus in 2019, and LTIPs were paid out at 81 companies, totalling £238.19 million.

The report’s authors argue that if companies guarantee performance-related pay then the value of that reward is weakened, while huge incentive payments also place disproportionate credit on one individual’s performance.

They argue that reform is needed in the way remuneration committees set executive pay levels, asking that decisions on top pay and bonuses are more fairly aligned with wider workforce pay, and that incentives are assigned in a more sustainable way.

This would be helped by greater investment in training and improvements in company culture and diversity, as well as customer experience and the environment.

CIPD chief executive Peter Cheese said: “It doesn’t look like the pandemic has proven to be an inflection point for executive pay yet. The bulk of cuts made so far appear to be short-term and don’t signify meaningful, long-term change.

“Pay among the FTSE 100 will probably fall next year, but this is more likely to be due to wider economic circumstances rather than a fundamental change in approach to executive pay.”

Cheese added that there was still a “disconnect” between CEO reward packages and their contribution to long-term company performance.

“Too big a share of CEO payments depends on the fluctuating fortunes of the stock market and not enough on whether they are a responsible custodian of the business for all stakeholders, including, of course, the workers who drive long-term value,” he said.

Remuneration boards should look at wider workforce issues and organisational culture as part of CEO pay review exercises, Cheese advised. ”Not only would this help incentivise CEOs to improve how their organisation invests and manages its workforce to support long-term performance, but it should make companies fairer, and, will help rebuild trust in business.”

The CIPD and the HPC also call for companies to set pay in a more democratic fashion, giving the workforce an opportunity to feed into the process, for example through an employee representative on the remuneration committee.

They also point out that committees could use less complex financial measures and introduce goals around environmental, social or corporate governance issues.

Luke Hildyard, director of the High Pay Centre, said: “Very high CEO pay undermines the spirit of solidarity that many companies are trying to project as they battle against the impact of the coronavirus.

“More pragmatically, multi-million pound pay awards worth over a hundred times the salary of a typical worker seems like an unnecessary extravagance during a period of such economic uncertainty.

“If we want to protect as many jobs as possible and give the lower paid workers who have got the country through this crisis the pay rise they deserve, we will need to re-think the balance of pay between those at the top and everybody else.”

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During 2019, six FTSE 100 companies paid their CEO more than £10m in total. Seventy disclosed the ratio of CEO pay to median pay of UK employees – the highest was 2,605:1 and the lowest was 15:1, the research found.
The median pension contribution given to a CEO is £189,000 per year, representing almost a quarter of their median salary. The median level of pension contributions for employees is just over 7%.

The report also revealed that for the first time in its four-year history, there are more women CEOs in the FTSE 100 (seven) than there are CEOs called Dave or David (six). However, mean pay for female CEOs is £4.02 million, more than £0.5 million lower than the mean pay figure for male CEOs (£4.74 million).

Jo Faragher

Jo Faragher has been an employment and business journalist for 20 years. She regularly contributes to Personnel Today and writes features for a number of national business and membership magazines. Jo is also the author of 'Good Work, Great Technology', published in 2022 by Clink Street Publishing, charting the relationship between effective workplace technology and productive and happy employees. She won the Willis Towers Watson HR journalist of the year award in 2015 and has been highly commended twice.

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1 comment

Karl Nightingale 5 Aug 2020 - 2:41 pm

All roads lead back to government intent. Without commitment to halt the march of chief and senior executives nothing substantive will be achieved. With such commitment anything is possible.

Comments are closed.

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