Median CEO pay falls, but is this the full story?

Median CEO pay falls, but is this the full story?

When it comes to corporate governance, no topic is more contentious than the pay of top CEOs.

The debate over whether companies pay their top executives excessively high salaries has been raging for years. Couple this with research from Edelman Trust showing that nearly two-thirds (62%) of the UK public want to see a redress of executive pay, it’s clearly an issue of high relevance.

So, for many, it was encouraging to see latest CIPD figures reveal the median pay of FTSE 100 CEOs actually fell 13% between 2017 and 2018 to £3.46m.

The CIPD’s report on FTSE 100 CEO pay also revealed that some CEOs had taken a significant pay cut over the year.

Simon Peckham, CEO of Melrose Industries, came under scrutiny in 2017 when he took home a massive £42.76m. However, in 2018, his pay package dropped by £41m to just over £1m.

But look behind the headline figures, and it becomes clear that we still have some way to go before we can confidently say executive pay is witnessing a sea change.

As the CIPD states, CEO pay has been volatile since 2010, so it’s hard to tell if this is the start of a longer-term downward trend.

The fact remains, while the average pay of FTSE CEOs has gone down – it is still 144 times higher than the UK median pay of £24,006 for all workers.

And, while Peckham did indeed receive a substantially lower income than the previous year, this may have more to do with Melrose Industries’ five-year long-term incentive plan (LTIP) policy, which sees him get high payouts some years and £1m on average in other years.

The fact also remains that 43 companies increased CEO pay in 2018, with a number of executives seeing their multi-million pound reward packages more than double.

Jeff Fairburn, then CEO of Persimmon, retained his title as the highest paid chief executive, receiving £38.97m in 2018 – down from £45.74m the previous year. However, this is still 1,318 times the median salary of a full-time UK worker. Fairburn stepped down as chief executive on 31 December 2018, not before receiving the full value of a 2012 LTIP.

The report also shows the gender pay gap needs to be tackled and addressed sufficiently to bring more fairness to the workplace.

The total remuneration for women CEOs represented just 4.2% of total FTSE 100 CEO remuneration, while their mean 2018 pay of £3.25m was approximately two-thirds that of their male counterparts, the CIPD stated, though this is a slight improvement from 2017 when it was just half that of their male peers.

Nevertheless, GlaxoSmithKline’s Emma Walmsley was the only female to make the list of top 25 highest paid FTSE 100 CEOs, with pay of £5.8m.

But it’s not just CEO pay that has come under scrutiny. The report showed many other senior FTSE 100 executives have received large payouts, with Prudential paying an unnamed employee £16.6m in 2018 — more than double the pay earned by chief executive Mike Wells.

According to the CIPD, remuneration awarded to other executive senior managers potentially creates a more significant cost than the amount spent on FTSE 100 CEOs.

“It is important to understand the scale of this cost and discuss whether it represents value for money in relation to the opportunity cost – for example, increased pay for workers in the middle and at the bottom,” it stated.

The biggest concern the report highlights is the sheer lack of evidence justifying executive pay packages. For example, the CIPD found almost no link between employee headcount and single figure pay – which it said was ‘surprising’.

“The number of employees should be a good indicator for the size and scale of the organisation, so if we accept that a larger company should have a more highly paid CEO, this might also apply to size in terms of employee numbers as well as market capitalisation.

“Instead, the lack of a discernible connection between pay and headcount suggests that boards and companies as a whole see their CEO’s responsibilities as being to preserve or expand market value, on behalf of shareholders, rather than to serve the interests of their workers or society as a whole,” the CIPD warned.

Last Updated: 1 September 2019
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