2020 is set to be a year where pay tops HR agendas, with increased scrutiny around pay transparency and the introduction of the CEO Pay Ratio Reporting requirement.
Companies will be obliged to publish their findings at the end of their financial year, so we anticipate results to appear spread across the year.
Backlash ebbs and flows around executive pay levels, which have traditionally been perceived as excessive. By 5pm on 6 January 2020, chief executives of Britain’s largest listed businesses had earned more than the average annual salary for a full-time employee of £29,559. Businesses are increasingly under pressure to justify very high levels of pay for top executives, particularly in relation to how the rest of the workplace is being remunerated. Fairness and openness around pay builds trust with external stakeholders and investors, as there is an increasing expectation that businesses act responsibly. Fair pay practices are a vital part of building a sustainable business.
A system of checks and balances
TUC general secretary Frances O’Grady says that every working person who has a part in creating Britain’s wealth should be recognised but “people at the top are taking more than their share.” Efforts to quell investor unrest over the size of its executives’ pension allowances led to Standard Chartered cutting the pay packets of its two top executives by £384,000 in total. Their bonus package now operates at 20 per cent of cash salary, whilst the Investment Association, that represents fund managers, recommends executive pension allowances be brought in line with the wider workforce, with whom contributions tend to be capped at about 10 per cent. Standard Chartered argues that its CEO pay calculation is different to the rest of their employees and is in line with the UK remuneration policy.
Market forces in operation may mean that the methodology is a somewhat blunt tool. Smith & Nephew, a medical devices manufacturer, discussed moving the company’s listing to the US, in part to avoid the UK’s executive pay constraints and bridge the pay cut the CEO experienced upon joining. Whilst the CEO and company ended up parting ways, there had been a mutual benefit that saw the company utilise his skills, expertise and extensive experience to build momentum behind the business, and the CEO had the opportunity to grow its revenue, overhaul its executive team and operating model. A new CEO has been ushered in from Roche therapeutics – proving that the right talent can be found in spite of resistance to pay acceleration.
The role of the remuneration committee
In our experience, the remuneration committee play a vital role. The make-up of committee members is crucial, as some may have little interest in curtailing escalating pay that establishes new benchmarks for their own executive pay. Relating corporate performance to executive pay has been tenuous in some cases, with levels increasing in spite of low investment levels, cash flow, rising debt and growing pension deficits.
A robust approach to executive pay
At Paydata, we are increasingly asked what a ‘good’ executive pay ratio will look like; the narrative plays a crucial role in outlining the numerous factors that lie behind the figure. The remuneration report for Virgin Money has been opposed in the second consecutive AGM protest in what was described as a ‘shareholder revolt’ last week, with concerns that disproportionately large bonuses were being paid despite concerns raised by investors and the fact that pre-tax losses widened over the last year. Remuneration committees need to take a robust approach.
A better distribution of income
The size and specialist nature of each organisation, sector differences and the role of National Living Wage will be greater in some sectors such as retail and care, impacting the calculation. It is key to ensure that your pay is benchmarked properly so that your ratio is not out of kilter with the market; and you can set out the methodology and performance assessments behind the different pay levels. This translates into the employee experience – individuals want to know that they are paid fairly so that this issue is taken off of the table. Whilst pay operates as part of a complex picture of employee engagement and is not alone a motivator, it can demotivate staff if they do not feel that they are paid competitively.
The nature of a CEO’s role is inherently stressful – they act as the figurehead of an organisation, carry the risk of the organisation and face personal liability in some cases. We question whether it is right to say that the individual will not take a bonus if losses for the annual accounts were inevitable, but actually minimised by the CEO. Deutsche Bank has waived their policy of ‘no-profit, no bonus’ following an extensive restructuring over the past year and cutting 18,000 jobs. Where there is evidence of a positive contribution, it is important to look at the individual circumstances of each ratio and the strategy behind decisions in place.
The CEO pay ratios will be published throughout 2020, with press coverage inevitably monitoring and commenting on them. The pressure to act will come from shareholders and customers – the fact that 10 years of ratios will be published is an incentive alone to act on the data and proactively address any stakeholder concerns.
Key stakeholders want to see that CEO pay is proportionate and aligned with performance – 2020 is the start of sustained scrutiny around pay practices throughout organisations.
Get in touch to discuss how pay operates across your organisation.