The way companies are managed – and how much bosses are paid – has been under particular scrutiny following the collapse and loss of 11,000 jobs at BHS and the revelations about pay and working conditions at Sports Direct.
Chief executives of FTSE 100 companies have a median pay package of £4.3 million, according to the High Pay Centre. It works out at 140 times that of the average worker.
Examples of massive pay-outs, often coincident with indifferent corporate performance and with average pay growth for workers sluggish, continue to inflame public opinion. And they help explain the upsurge of populism that has brought political mayhem here, in America and across Europe.
Few developments in recent times have symbolised the widening gulf between “the 1 per cent” and the rest more forcefully than the strong growth in executive pay compared with near-standstill average wages.
Such high levels of executive pay have been justified on the basis of corporate performance, using such metrics as earnings per share or shareholder total return.
But a damning study released last week showed that the link between executive pay and company performance is negligible. The research, by Lancaster University Management School, found that the chief executives of Britain’s leading 350 companies each took home a median pay package of £1.9m in 2014, a rise of 82 per cent on 13 years ago.
But the rise was not mirrored in the fortunes of their employers, with return on invested capital – the report’s preferred measure of performance – up by less than one per cent. The report’s authors said, “Our findings suggest a material disconnect between pay and fundamental value generation.”
The study found that the increase in pay since 2003 was largely down to performance-related bonuses. This was despite the fact that “the median FTSE 350 company generated little in the way of a meaningful economic profit over the period 2003-2014.”
It warned that measures typically used by companies to calculate performance, such as total shareholder return and earnings per share growth, placed too much emphasis on “short-term” results. The CFA UK chief executive, Will Goodhart, said: “Too few of today’s popular approaches… genuinely align senior executives’ pay with the economic value that they create.”
The study will fuel growing calls for reform of corporate governance more generally. The Investment Association, whose members manage £5.7 trillion of assets, has written to all FTSE 350 businesses with its latest set of principles on executive pay.
And BlackRock, the world’s largest investor, has threatened to vote against the re-election of board directors who fail to rein in outsized pay packages for their top executives. Amra Balic, head of BlackRock’s investment stewardship team, said: “We will be voting against [remuneration] committee chairmen if we think there is a disconnect between [executive] pay and performance.”
In November, the UK Government issued a Green Paper to explore improving how companies are run. It proposed that a shareholder committee could be set up “to scrutinise remuneration and other key corporate issues such as long-term strategy and directors’ appointments”.
The UK Individual Shareholders’ Society (ShareSoc) and the UK Shareholders’ Association (UKSA), who represent retail (individual) investors, said the initiative at RBS should benefit corporate governance “and represents a valuable opportunity for RBS to lead the way in exploring a concept which works well in other countries”.
“Good luck with all that,” veterans of corporate governance reform may well sigh. Reform has long been attempted – but with results that have fallen far short of expectations. Boardroom pay has dominated the dialogue in the UK between boards and investors for the past 20 years since the publication of the Greenbury report. And the year 2017 will mark the 25th anniversary of the publication of the Cadbury Report and the development of the UK’s first corporate governance code. Yet still the pay gap has widened.
One solution seized upon seems only to have fallen victim to the very excesses it sought to curb. So-called Long-Term Incentive Plans (LTIPs) were brought in to replace discredited stock options. But complex LTIP arrangements, often covering pages in the annual report with bewildering calculation and jargon, have largely failed. Many prioritised shareholder returns, and earnings per share in particular – a statistic easily massaged. Another problem is that they delayed payouts for five or more years – by which time the performance of the business may have turned down. Bob Dudley, head of oil giant BP, faced a revolt over his pay package last year ($19m in total, including a $7m performance share pay-out) when the shares had fallen by some 15 per cent in 2015.
Putting workers on boards is advocated by many. But the experience of Germany shows that this has only limited influence. The new year may be the last chance for calls such as that from Anthony Carey, head of board practice at accountancy firm Mazars, for a corporate governance commission. This, he wrote in the Financial Times last week, would “look at reforms needed to enable companies to achieve long-term sustainable success that benefits all their direct stakeholders and wider society” and build on the parliamentary inquiry and the recent Green Paper on corporate governance reform.
Political patience is wearing thin. Failure here would drive up the populist revolt another and more troubling notch.