COVID-19 pay cuts fail  to address excessive bonus culture

The recent short-term  COVID-19  related  pay cuts by some  FTSE 100 firms have failed  to address the UK’s excessive executive bonus culture, confirmed recent research from the CIPD and  the High Pay Centre. Although 36 FTSE 100 companies have announced executive pay cuts in response to  the  COVID-19   crisis and economic downturn, “this  doesn’t signal  a  sea change  for reining in excessive  incentives”, noted the research.

While most of the 36 firms used  a combination of measures to cut pay, the report suggests these are mainly “superficial  or short-term”, confirmed the report FTSE 100 CEO Pay in 2019 & during the pandemic. The most common  measure taken by around 14 companies has been to cut salaries at the top by 20%.  However,  salaries typically only make up a small part of a FTSE 100 CEO’s total pay package, according to the research.  Around 11 companies have cancelled  Short-Term Incentive Plans (STIP) f or  their CEOs  while two other firms have deferred salary increases for their CEOs.  None of the 36 companies have chosen to  reduce  their CEO’s  Long-Term Incentive Plan  (LTIP), which  typically  makes up half of a  CEO’s total  pay  package, noted the study.

For the financial year ending 2019, the  report  found that  FTSE 100 CEOs took home a median pay package worth £3.61m,  which is  119 times greater than the median  earnings  of a UK full-time worker (£30,353).  This is broadly the same as the median FTSE 100 CEO  salary  for the financial year ending 2018  (£3.63m)  and  only  represents a  0.5% decrease.   Performance-related pay policies  also continued to be paid out. Around  88 FTSE 100 companies paid  their  CEO  an  annual bonus  in 2019,  with total payments reaching  £108.48m.  ‘Long Term Incentive  Plans’  (LTIPs)  paid out at 81 companies  totalled around £238.19m.

NEED FOR REFORM

The report argues that  when performance-related pay is almost guaranteed  (as  appears to be the case when the overwhelming majority of  policies  pay out every year) its value as a reward or incentive is greatly weakened.  Huge incentive payments also risk  giving  individual executives  disproportionate  credit  for performance dependent on a much wider range of factors, such as the economic context or the contribution of the company’s  wider  workforce.  

The CIPD and High Pay Centre believe that the findings underscore the need for “reform to  the remuneration committees that set executive pay”.  Building on the  amended UK Corporate  Governance  Code  2018,  they  want  decisions on  top  pay and  bonuses  to be  more fairly aligned with wider workforce pay  and  to  incentivise  other areas critical to longer term sustainability. This includes  investment in training and improvements in company culture and diversity, as  well as customer  experience  and the  environment.

“It doesn’t look like  the  pandemic  has  proven  to be  an inflection point for executive pay  yet,” pointed out Peter Cheese, Chief Executive of the CIPD, the professional body for HR and people development. “The bulk of cuts made so far  appear to be short-term  and don’t signify meaningful, long-term   change.  Pay among the FTSE 100 will probably fall next year, but this  is  more  likely  to  be due to  wider economic circumstances  rather than  a  fundamental change in approach to executive pay.”   

FAIRER SYSTEMS

There’s still a “disconnect between the total reward packages of CEOs in the FTSE 100 and their actual contribution to long-term company performance”, according to Cheese. “Too big a share of CEO payments depends on the fluctuating fortunes of the stock  market and not  enough  on whether they are a responsible custodian of the business for all stakeholders, including, of course, the workers who drive long-term value.  As well as other  environmental and social  factors,  now  more than ever, RemCos  should be looking at wider workforce issues  and organisational cultures  to help them determine CEO pay.   Not only would this help incentivise CEOs  to improve how their organisation invests and manages its workforce to support long-term performance, but it should make companies fairer and will help rebuild trust in business.” 

Adding to his comments, Luke Hildyard, Director of the High Pay Centre think tank,  stated:   “Very high CEO pay undermines the spirit of solidarity that many companies are trying to project as they battle against the impact of the coronavirus. More pragmatically, multi-million pound pay awards worth over a hundred times the salary of a typical worker seems like an unnecessary extravagance during a period of such economic uncertainty.  If we want to protect as many jobs as possible and give the lower paid workers who have got the country through this crisis the pay rise they deserve, we will need to re-think the balance of pay between those at the top and everybody else.”

OTHER KEY FINDINGS

Further key findings from the  FTSE 100 CEO pay in 2019 and during the pandemic  report reveal that:   

• The highest paid FTSE 100 CEO received a total pay package of £58.73m. This is 1,935 times the median salary of a full-time UK worker.  
• Six firms paid their CEOs more than £10m in total.  
• 70 companies disclosed the pay ratio between their CEO and the median pay of their UK employees. The highest quoted pay ratio was 2,605:1 and the lowest was 15:1. The median was 84:1 . 
• The median pension contribution (or equivalent) given to a CEO is £189,000, representing 24% of their median salary. In comparison, pension contributions for employees represents 7.2% of their  wages and  salaries. 
• For the first time in the report’s four-year history, there are  now  more women FTSE 100 CEOs  (seven)  than there are CEOs called  David/Dave  (six),  Andrew/Andy/André  (six) or  John  (five).  However,  mean  pay  for  female CEOs  (£4.02 m)  is lower  than mean pay of male CEOs  (£4.74m)  
• The under-representation of black CEOs in the FTSE 100 is even more stark than the gender imbalance. While the Corporate Governance Code does not require firms to report the ethnicity of their senior management teams, other sources suggest there are currently no black British CEOs in the FTSE 100.  

RECOMMENDATIONS

In response to the research, CIPD and High Pay Centre recommend that:  

• Pay should be set in a more democratic fashion with the company’s workforce  given the opportunity to feed into the process, for example,  via an employee representative on the RemCo. 
•  To help all stakeholders understand CEO reward packages more easily,  RemCos  should use fewer complex financial measures and incorporate more environmental, social and governance (ESG) goals  instead. 
• RemCos  should ensure that the benefits CEOs  and other senior executives enjoy are fair in relationship to what the rest of the workforce receive, such as health benefits and pension contributions.
• The Corporate Governance Code should be amended to require publicly limited companies to report on the ethnicity of their senior management teams and their direct reports. 

Click here for a copy of the full report.