Please Sir (or Madam), can I have some more?

Please Sir (or Madam), can I have some more?

At the turn of the century, executive remuneration in the UK was relatively straightforward. Packages typically comprised of a reasonable salary, modest variable remuneration (annual bonus and grants of market price options) and participation in a defined benefit pension scheme. Then 20 years ago, and with the aim of improving transparency and accountability, companies were required to produce an annual remuneration report and to submit this to a shareholder vote each year.


Like many well-intentioned ideas, there were unintended consequences - everyone knew what everyone else was being paid. Remuneration consultants were quick to spot an opportunity. Remuneration committees (groups of independent directors which set executive pay) were routinely presented with benchmarking exercises designed to illustrate how underpaid their executives were. Not wishing to run the risk of executive departures, committees generally took such “independent” advice at face value. This use of benchmarking is almost singlehandedly responsible for the relentless rise in executive pay since. Companies will often use inappropriate peer groups (whether that be sector, market cap or revenue driven peer groups) to illustrate how underpaid they are. Shareholders have not been entirely innocent having consistently called for a greater degree of at-risk remuneration, thereby further increasing quantum.


It took a global pandemic to apply the brakes to ever increasing pay. However, this has proved to be only a temporary blip, and this reporting season we have seen a continuation of the trend (though maybe not to the same extent). In a world in which inequality has never been greater and the cost-of-living crisis is disproportionately affecting the lower paid, where are we going in the future?


Well, if the Head of the London Stock Exchange, Julia Hoggett, gets her way, executive remuneration will climb ever higher. She has recently called for higher UK executive pay in an effort to retain talent, encourage listings and to deter companies from moving overseas. In particular, she is calling for UK firms to pay bosses to match counterparts in the US.


So how frequent is this exodos of talent from the UK? In 2019, Smith & Nephew lost its CEO as they were unable to meet his pay demands. In more recent times, the CEO of Reckitt Benckiser (a company not known for its modest approach to pay) crossed the pond to head up Starbucks. So, whilst it does occur, it is far less frequent than suggested, although we may not have visibility of those who could not be recruited in the first place. It may be argued that simply matching pay would achieve little to encourage listings, since the greater opportunities for access to capital in the US is a far greater pull.


Our argument is that the reticence to list in the UK is a far more complex issue than just pay, and that this is possibly only part of the equation for companies that are truly global in nature rather than every UK plc.


We will of course examine proposals on a case-by-case basis, recognising that certain UK companies are truly global and that it is essential to be able to adequately incentivise and retain individuals at the helm. To use a footballing analogy, it is sometimes necessary to pay top dollar for true global superstars, but we are keen to avoid overpaying for averageness.


So where are we going? Well if Julia Hoggett gets her way, only upwards!

Important disclosures

More about the authors

Andrew Woods Responsible Investment Manager

Andrew Woods is a responsible investment manager responsible for voting and engaging with the companies held within the equity and multi-asset portfolios.

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