The so-called shareholder spring has led to an investor rebellion against high earners. So how do businesses reward top bosses without damaging their image or the bottom line?
It is, as they say, tough at the top. But increasingly it’s also tough for those appointing the people at the top. Public - and shareholder - anger at the spiralling pay of FTSE 100 top executives is increasing, posing a more tangible reputational risk to companies and putting remuneration committees under the spotlight.
“Top pay has got out of control over the past decade,” says Institute of Directors head of corporate governance Dr Roger Barker. The debate long ago crossed from boardrooms and the financial pages to pubs and school gates. On 29 June, the Sun newspaper called for the resignation of Barclays’ soon to be ousted chief Bob Diamond under the Pink Floyd-inspired headline
“Sign on you crazy Diamond”. It reflected public anger over allegations that the bank had attempted to rig the Libor rate - and over his salary.
“Excessive pay can weaken a company’s reputation to the extent that it struggles to shrug off subsequent scandals,” says Barker. “There was a time when companies were concerned that they weren’t paying enough to ensure they got the best top staff. But that situation has been reversed. Now they worry that they are paying too much.”
High pay may have encouraged risk-taking by rewarding strong performance without considering the risks assumed in achieving that’
The roll call of recent scandals shows that even when a company appears to be doing well, things may not be as they seem. Ferma president Dr Marie-Gemma Dequae identifies a key concern over high pay. There is a sense, she says, that it “may have inadvertently encouraged excessive risk-taking by rewarding strong performance without appropriately taking into consideration the risks assumed in achieving that performance”.
The debate has partly been brought into the open because of the transparency that is seen as an essential part of modern corporate governance. But it’s not just the availability of data on remuneration settlements that is driving the debate. “There is a widespread sense that some salaries appear out of line with ideas of appropriateness and fairness,” says Barker.
“Remuneration committees need to engage with this. While there is recognition that pay should reward success, in many cases huge settlements seem quite out of step with corporate performance.”
Concerns over levels of pay can have a negative impact on a company’s reputation, both with the public or shareholders. “In Belgium I know of one company announcing a big increase of compensation for its chief executive and at the same time announcing that 600 people had to be laid off,” says Dequae. “Consequence: strikes, decrease of stock price, a lot of discussions.”
“We’re seeing a shareholder spring right now,” says Barker, “and it has already claimed some high-profile scalps.” In recent months many large City investors seem to have woken up and are making a big noise at shareholder meetings. This is largely because their billion-pound funds have been created from the savings of ordinary people - through ISAs and pensions - and these savers are increasingly angry with what they see as overpaid executives. They want rebellion.
In addition, investors are keen to demonstrate that they can act on pay before the government legislates and regulates, which will force their hand. Witness the humiliation of WPP chief executive Sir Martin Sorrell, whose £13m pay packet was voted down earlier this year. “Scenes like this are very negative for a company,” says Barker. “It sends the message that the chief executive doesn’t understand or isn’t listening.”
The smart companies seem to be managing the reputational risk posed by the shifting public mood. And they have escaped the public’s attention simply because they are successful at keeping out of the spotlight.
Dequae sums it up. “All parties need to be convinced that the outcome is equitable; the objectives in terms of attraction, motivation and retention of staff are effectively achieved; and internal and external demands are efficiently dealt with.”
Barker adds: “Remuneration committees need to think very carefully about whether or not pay is justified in terms of performance. And they need to engage with shareholders’ opinions about this as well. More generally, they need to take into account the perspectives of society and the media environment. They should be very careful about awarding large settlements unless performance is absolutely stellar.”
Establishing external pay equity is also vital. “Use two or more reliable sources for external benchmarking of organisations in a similar industry, of similar size and complexity,” says Dequae. “[Make sure there is] internal pay equity within the organisation in terms of different levels of remuneration, that the remuneration reviewing committee has well-established remuneration policies and there is an effective remuneration committee within the board.”
Paying too much for the wrong candidate
Another risk has been exposed by the controversy over high pay: paying too much for the wrong candidate. “When recruiting top staff it’s often very difficult to know how good the alternative applicant, who would do the job for less, could have been,” says Barker. “It’s often been argued that you have to pay top whack to get the right person, but remuneration committees need to challenge that assumption. Ultimately no one is irreplaceable.
“Because executive pay may not in itself be a significant proportion of a large multinational’s corporate budget, high pay has been seen as an easy option to attract the right person and avoid turmoil in the share price. But this is changing as shareholders become more vocal over pay.”
This has developed into a political issue for the whole business community. “What we are seeing is that smaller companies, where pay really isn’t an issue in the same way, are being tarred with the same brush as the FTSE 100 by the public,” says Barker. “This is really damaging attempts to rebuild confidence and trust after the financial crisis.”
Tackling excessive salaries – and being seen to do so – could pay dividends way beyond the companies directly involved.
- Executive pay has fuelled public fury in the past decade
- Big salaries are seen as unfair and regarded with suspicion
- There is pressure on remuneration committees to act appropriately
- Equity and links to performance are more important than ever
FTSE 100 bosses enjoyed an average 12% rise in their salaries in 2011, according to a survey by corporate governance specialist Manifest and pay consultancy MM&K (see top 10 earners, right). While the median increase in chief executive pay in FTSE 100 firms was 10%, in more than 25 firms the rise was greater than 41%. The median increase for employees at FTSE 100 companies was 1%. The median ‘realisable remuneration’
across the FTSE 100 was £4.2m.
Out of control?
Top 10 highest paid chief executives, 2011 (Manifest/MM&K)
1. Bob Diamond, Barclays £20.9m
2. Sir Martin Sorrell, WPP £11.6m
3. David Brennan, AstraZeneca £11.3m
4. Sir Andrew Witty, GlaxoSmithKline £10.7m
5. Marius Kloppers, BHP Billiton £9.8m
6. Peter Voser, Shell £9.7m
7. Sir Frank Chapman, BG Group £9.6m
8. Michael Spencer, ICAP £9.3m (2010)
9. Samir Brikho, Amec £8.9m
10. Dame Marjorie Scardino, Pearson £8.9m
It’s raining cash
Thames Water boss Martin Baggs found out earlier this year how high levels of pay can exacerbate a difficult relationship with the public.
He came under fire across the media for accepting a £420,000 bonus while his company was imposing a hosepipe ban on millions, experiencing a drop in profit, recording ‘deteriorating’ satisfaction among its 8.8 million customers, and increasing prices for domestic customers by 6.7%.