FTSE 100 CEO pay drops - but hold the cheers, say pension funds

UK chief executives’ average pay fell 17% in the past 12 months but shareholders should not become complacent in the push for fairer remuneration, according to the UK’s pension fund trade association.

The fall in FTSE 100 CEO pay was revealed in analysis published today by the CIPD, the professional body for human resources, and the High Pay Centre, a think tank.

The annual survey found that the average FTSE 100 CEO received an annual pay package of £4.5m last year, compared with £5.4m in 2015.

Luke Hildyard, policy lead on stewardship and corporate governance at the Pensions and Lifetime Savings Association (PLSA), said the reduction was “small but significant” and viewed positively by the association.

“However, any complacency would be wrong,” he added. “PLSA research has suggested that many companies are not listening to feedback from shareholders on this issue and the vast majority of pension fund investors think that pay gaps between executives and the wider workforce are too large.

“Our members will be concerned by the fact that multi-million pound pay packages remain the default arrangements for CEOs, despite an absence of convincing evidence that they are necessary to incentivise or reward good leadership.”

The 17% reduction drops to 15% if the pay of Martin Sorrell, chief executive of WPP, is excluded. He was the top earner in 2016, although his pay dropped by more than the average for the 25 highest-paid FTSE 100 CEOs.

The CIPD/High Pay Centre analysis also showed that the average CEO was paid 129 times more than their average employee, down from a ratio of 148:1 in 2015.

Increased pressure from investors and politicians as well as public opinion was said to be behind the drop in CEO pay.

Investors have linked it at least in part to their efforts.

Sacha Sadan, director of corporate governance at Legal & General Investment Management, said the asset manager had last year published revised pay principles and a paper highlighting inequality, which it sent to FTSE 350 executives.

“We are encouraged by the progress being made and will continue to push companies to address pay inequality between CEOs and employees in order to achieve pay structures that are aligned with all stakeholders,” he said.

A spokesperson for the Investment Association said: “The fall in CEO’s pay packages shows that FTSE 100 companies are listening to the demands of their shareholders and this is a welcome step in restoring public confidence in executive pay.

“We have seen some companies working in the right direction this AGM season, with several FTSE 100 companies taking into account pay levels when setting their new pay policies.” 

Flash in the pan?

Others pointed to political influence on investors’ behaviour.

Charles Cotton, policy adviser for performance and reward at CIPD, and Stefan Stern, director at the High Pay Centre, said investors’ focus on executive pay may have been linked to an assumption that the government would this year seek to introduce legislation with recommendations on pay ratios, worker representatives on remuneration committees and annual binding votes.

This assumption had been “upended” as a result of the Conservative party losing its majority following the June general election, they said. 

“Will the new minority government devote its limited time to reforming the way that big businesses are governed and its leaders remunerated?” they wrote. “Or will it focus all its energy on Brexit?

“Our concern is that if the government vacates this space, CEO remuneration will accelerate once more, undermining employee engagement and attempts to boost workplace productivity.”

Peter Cheese, chief executive of the CIPD, said: “We have to hope that the reversal in rising executive pay is the beginning of a re-think on how CEOs are rewarded, rather than a short-term reaction to political pressure. The fall in executive pay is a step in the right direction, but it’s still happening within an overall reward system where average wages in the UK have been flat.” 

In a major campaign speech last year before becoming prime minister, Theresa May pledged to tackle “corporate irresponsibility”, saying there should be binding votes on remuneration packages and that companies should disclose pay ratios.

A subsequent government consultation on corporate governance reflected a softer stance, however. Company disclosure of CEO-employee pay ratios was proposed, but neither the idea of annual binding votes on pay packages nor that of electing employees to boards featured in the consultation.