Total FTSE 100 Chief Executive pay has increased by 11 percent in the past year. CEO reward increases outstrip pay rises for the wider workforce, fuelling questions over fairness and governance in Britain’s biggest businesses.
An annual assessment of FTSE 100 CEO pay packages released today shows that CEO median pay rose by 11 percent between 2016 and 2017, despite prominent criticism from the investor community and the Government over excessive CEO pay awards in the past year.
The research from the CIPD, the professional body for HR and people development, and the High Pay Centre, the independent think tank for pay and governance, has found that FTSE 100 CEO median pay now stands at £3.93 million per year, an increase on £3.53 million in 2016.
This year’s analysis is affected by two very large payouts for the CEOs at Persimmon and Melrose Industries (£47.1 million and £42.8 million respectively). As a result of this, this year’s CIPD/High Pay Centre report leads with the median, rather than the mean figure. Using the median measure of CEO remuneration reduces the impact of these two outliers, but it still shows an increase in earnings of 11 percent, compared to the 2 percent rise in median pay enjoyed by full-time workers over this period.
However, if the mean measure is used, then it shows that CEO mean pay across all FTSE 100 companies has increased by 23 percent over the same period, from £4.58 million in 2016 to £5.66 million in 2017. Excluding Persimmon and Melrose Industries from the analysis would see the 2017 mean CEO single figure fall from £5.66 million to £4.85 million. However, this is still higher than last year’s overall mean figure of £4.58 million by 6 percent, showing an underlying trend of rising executive pay.
Further highlights from this year’s CIPD and High Pay Centre analysis include: The highest paid CEO in the financial year ending 2017 is Jeff Fairburn of Persimmon plc who has received £47.1 million, 22 times his 2016 pay. Simon Peckham of Melrose Industries plc received £42.8 million, 43 times his 2016 pay.
The mean pay ratio between FTSE 100 CEOs and the mean pay package of their employees is 145:1, which is higher than last year (128:1 in 2016, 146:1 in 2015).
As a FTSE 100 CEO, you are as likely to be named David or Dave, or Stephen or Steve, as you are to be a female CEO. Just seven FTSE 100 CEOs are women, an increase from six in 2016 and five in 2015. At the current rate of one new female CEO each year it will take another 43 years for women to make up 50 percent of the FTSE 100 CEOs.
While women make up 7 percent of FTSE 100 CEOs, they earn just 3.5 percent of total pay.
Only 34 companies in the FTSE 100 are accredited by the Living Wage Foundation for paying the living wage to all their UK-based staff.
Peter Cheese, chief executive of the CIPD, said: “Despite increased investor activism and the planned introduction of pay ratio reporting, the evidence suggests that very little is changing when it comes to top pay in the UK. It’s disappointing to see that CEO pay has held up in the face of increasing pressure when average pay across the workforce which has barely shifted in recent years. However, pressure is building in the system.
“Given the ongoing issues of trust in big businesses and a push for greater transparency, it really is time businesses and boards put greater scrutiny on high pay, and that they think much more objectively about what they are rewarding CEOs and how. Financial performance alone does not signify CEO success, and must be balanced with development of the organisations long-term sustainability and value. Investors and boards need to look beyond share price, and consider a much broader range of indicators that show how that individual is performing for the long-term good of the business, its workforce and other stakeholders.
Rachel Reeves MP, and chair of the Business, Energy and Industrial Strategy Committee, which is managing an enquiry on ‘Corporate Governance – Delivering on fair pay’, said: “Excessive executive pay undermines public trust in business. When CEOs are happily banking ever larger bonuses while average worker pay is squeezed, then something is going very wrong. Recent revolts on pay awards show that shareholders are increasingly sharing this frustration at unjustifiable pay awards. Executive pay must match performance. Boards and Remuneration Committee Chairs need to ensure that CEOs are rewarded for delivering genuine long-term value for the company. If Boards and Remuneration Committee chairs are so out of touch they are prepared to waive through off-the-scale reward packages, then shareholders must strike back and hold them to account. If businesses don’t step up on executive pay, then Government will need to step in”.
Luke Hildyard, director of the High Pay Centre, said: “It is deeply unsettling that such a substantial pay gap remains between CEOs and ordinary workers. How pay is distributed within organisations has a big effect on living standards, and by many measures the UK is one of the most unequal countries in Europe. Big CEO pay increases reflect poorly on corporate culture and accountability and suggest that bolder reforms to corporate governance may be needed. In this light, the weakening of plans to give workers representation on company boards could be misguided.”
In this latest analysis, the CIPD and the High Pay Centre found that the majority of CEO pay packages come from variable pay, with just 16 percent of total remuneration being represented by base salary (a fall from 20 percent in 2017). This is largely due to an increase in the use of long-term incentive plans (LTIPs) which represent 56 percent of total pay, an increase from 48 percent last year. The increased use of LTIPs comes despite the fact that many respondents to the Government’s Green Paper on Corporate Governance “expressed concern that LTIPs are not adequately aligning executive remuneration with long-term company performance.”
Peter Cheese, CIPD, continues: “Remuneration committees must look at top pay in the context of the organisation’s overall reward strategy to ensure a fairer alignment and proportionality for top pay. They should challenge for evidence on how pay and bonuses impact individual performance and how much performance is due to an individual’s efforts or if they fall in a wider economic context. In particular, they must properly examine traditional mechanisms like bonuses and long-term incentive plans. These have become an ever-larger part of executive reward and are factors behind some of the staggering pay-outs witnessed over the last year. Businesses must question their appropriateness and look at more rounded, more relevant approaches to pay in this new age of corporate governance.”
To advocate fairer and more ethical approaches to pay and reward, the CIPD and the High Pay Centre have the following recommendations:
- Rather than waiting for the pay ratio reporting requirement to come into force in 2019, companies should introduce it immediately, supported by a clear narrative
- Companies should provide clearer information about wider pay distribution within their organisations.
- Policy-makers and companies should review whether existing remuneration reports can be reduced in length and complexity to ensure they can be easily scrutinised
- Remuneration committees and shareholders should place stronger emphasis on ensuring CEO reward is aligned with pay practices throughout the organisation
- Remuneration committees should ensure that CEO performance is assessed by non-financial as well as financial measures, including investment in workforce training and development and indicators of employee satisfaction and well-being
- HR professionals have a vital and critical role to play in influencing remuneration committees and must ensure that senior leaders receive and act on the insights from pay data, appreciating the various ways that reward can incentivise and affect behaviours and performance across the workforce
The CIPD and the High Pay Centre will publish a new report this autumn which examines how the remuneration committee can be reformed to deliver better outcomes on pay – for low, middle and top earners – from the perspective of all stakeholders.