Whilst HR professionals continue to respond to challenges presented by the coronavirus outbreak, initiatives that were imminent, such as the extension of the IR35 tax rules and upcoming gender pay gap reporting deadline have been deferred for a year. However, the CEO pay ratio reporting set to come into effect this year will already be captured by the majority of businesses and be disclosed in annual reports.
We are consistently asked, ‘what is a ‘good’ CEO pay ratio?’ Here, we examine how the narrative behind the ratio will be shaped by the executive team’s subsequent actions following the outbreak and how they prioritise the pay of their employees at this difficult time.
The principles driving CEO Pay Ratio Reporting
Fairness is at the heart of the CEO pay ratio regulations, which require the pay ratios to be published for companies who employ over 250 employees. The reporting requirement has been introduced to rein in perceived excessive levels for some executives. The risk inherent in the role has seen steadily increasing levels that some argue are almost an insurance policy, just in case CEOs feel it necessary to retire after joining the helm of a riskier business. At less senior levels, salaries are not a life-changing amount; the extent of the imbalance risks external perceptions that top individuals do not deserve such high levels of remuneration.
Concern over executive pay levels are driven by stark statistics such as the fact that by Monday 6 January 2020, FTSE 100 CEOs had already made the same amount of money that the typical employee does in the entire year. The CIPD reported that top bosses earn 117 times the annual pay of the average worker. The changes under the Companies Act (2006) require firms to provide their pay ratio figures and a supporting narrative to explain the ratios.
Challenges to executive pay systems pre-coronavirus crisis
Initiatives to challenge the system of pay hit the news recently, before the coronavirus pandemic, with Gravity Payment’s CEO Dan Price committing to paying all of his staff $70,000 as a minimum salary. In order to facilitate this pay system on behalf of his workforce, Dan Price had to slash his salary by $1m, mortgage his two houses and give up stocks and savings. However, the company has subsequently more than doubled the value of payments that it processes from $3.8bn to $10.2bn.
Whilst not all measures around executive pay will be that drastic for organisations that wish to show their commitment to their employees, executive pay is a powerful symbol of the organisation’s wider commitment to fair wages and acting in an ethical way. By taking pay out of the equation and challenging norms through innovative thinking, employers can achieve ethical and fair pay practices that motivate their workforce and drive productivity.
The ongoing impact of coronavirus
Whilst the push for transparency around pay has come from an inherent sense of fairness and striving for a more equal workforce over the last few years, undoubtedly the coronavirus outbreak will push the issue of executive compensation into sharp relief at AGMs around the world. Management and shareholders will weigh up the impact of the pandemic on their businesses and link executive paychecks to new measures. Before the outbreak, considerations including zero carbon emission initiatives, the collective pay of all employees and worker health were all being considered in designing executive pay schemes. This sensitive issue brings with it huge political and reputational risk for companies trying to remain operational at this time.
As companies face difficult decisions about costs and whether or not to furlough employees, these uncertain times may provide a greater opportunity for employers to strengthen trust with their employees, by supporting them through this difficult period. An authentic leadership response in this crisis can dictate long-term employee trust which in turn translates into a more genuine relationship with customers, building a culture set to thrive when this crisis passes.
Executive pay cuts are a growing trend
There are concrete examples of executive pay cuts that have been announced to stem job losses and costs to businesses during this time. Some CEOs have even sacrificed their entire salary for the year to stem job losses, such as the CEOs of Disney and the world’s largest hotel chain the Marriott, not taking home a salary for the rest of the year, with the rest of the Marriott executive team taking a 50 per cent pay cut. This is an important step in showing solidarity with the whole workforce, of which tens of thousands have had to be furloughed.
The dire economic situation is throwing remuneration into the spotlight. Whilst foregoing or reducing salaries of the top paid executives may not contribute to huge savings to operational costs of an organisation, it is an important and valuable message to employees that the organisation is responding collectively to the global pressures that the pandemic is placing on businesses. Benchmarking may help to set competitive levels of pay that are in step with the market, particularly where M&A activity may increase in this turbulent time.
Action will increasingly be expected from executives across the board in order to not drain the finances of organisations under intense pressure. The government has also been urged to consider the pay ratios of firms applying for support in an effort to curtail the long-term economic impact of the support granted by initiatives such as the Job Retention Scheme.
Behaviours of top executives will define the organisation as an employer. To furlough whilst full remuneration still operates at the top of the business would undermine the message of being a united workforce. The CEOs of Morgan Stanley, Citigroup, Visa, FedEx and the Bank of America are amongst those who have pledged not to lay off any workers in 2020, signaling the importance placed on weathering the crisis as opposed to reactionary redundancies that lose top talent.
Translate pay into organisational excellence
Shareholders increasingly scrutinise the justification for high levels of pay and behaviours. Windfall executive pay is increasingly challenged, such as shareholder BlackRock’s recent rebellion over executive pay at Qualcomm, where they criticised the chipmaker’s decision to award its chief executive $3.6m. A narrative that outlines how executive pay is proportionate and aligned with performance must accompany the ratio to satisfy key stakeholders.
Behaviours should be factored into the reward strategy, as opposed to focusing reward purely on growth, which can be far removed from day to day. All of these metrics need to be reflected and embedded in the calculation of executive pay, which is upheld at the top level of the business. Incentives purely linked to shareholder return and profit margins are out of step with the world right now and the collective challenges faced globally in the midst of this pandemic. Incorporating the customer, their values and wider recognition of the organisation’s role in society into the framework of how employees are rewarded is a responsible and future-proof way of setting executive pay that can withstand scrutiny.
Champion standards with pay
We can help and provide guidance around executive pay practices, setting the pay ratio in context or addressing wider remuneration challenges facing your organisation during this period, so please get in touch.