Are FTSE 100 bosses overpaid?

Too often the gap between the pay of bosses of the largest companies and the average pay of their workers increases. Even during the course of a pandemic when millions are at risk of losing their jobs, the top bosses in the UK don’t face their share of the burden. The Annual CIPD/High Pay Centre report has found FTSE 100 CEOs are paid an average of almost 120 times the median earnings of full time workers in the UK.

In the report they also point out:

  • 36 FTSE 100 companies have announced cuts to executive pay in response to the COVID-19 crisis and economic downturn, but this doesn’t signal a sea change for reining in excessive incentives
  • 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
  • The report argues that when performance-related pay is almost guaranteed – as appears to the be the case when the overwhelming majority of policies pay out every year – its value as a reward or incentive is greatly weakened.

One could argue the CEOs of listed companies deserve this pay in an increasingly globalised and therefore more competitive world. That they have to make the big decisions and take on the biggest responsibilities. That they are experienced and have proven themselves capable of the qualities investors might look for – commercial acumen, professional presentation, an understanding of the business and so forth. And yet the arguments in defence of high pay simply do not stack up.

To illustrate the excesses of executive pay, by the 4th January each year, executives have already earned what their average employee earns in a whole year. In those potentially just three working days, how many executives have actually made a meaningful decision that benefits stakeholders?

Managers not owners or entrepreneurs

Another issue that I have is that most FTSE 100 bosses are not company founders or entrepreneurs. Ocado is one exception that springs to mind. On the whole these CEOs are managers who take little personal risk, unlike many private investors or entrepreneurs. That’s not to say they don’t have skills and aren’t to some degree deserving of a salary that matches the value they bring, but executive pay is now out of control. The consistent lack of skin in the game, relative to their very large salaries is I think troubling. Executives are often very happy to sell share awards and pay themselves handsomely, but too often don’t show the same faith in the company they run.

I am not against rewards for entrepreneurial founders. If shareholders want to reward those men and women for creating a company, taking risk and employing people then that’s up to them. I still think it’s right to have checks and balances in place to ensure all stakeholders are looked after, but it’s more natural for a founder to have a large stake in their business and for all stakeholders, including shareholders, to be grateful for their achievement. Too often though professional managers are rewarded for a job not well done.

Rewarded for failure

Rewards for failure are unfortunately endemic. While I appreciate some executives are managing businesses with big structural issues and while it can be hard for a CEO to influence the share price, especially of a FTSE 100 company there nonetheless is a problem with the reward scheme in big companies.

Let’s take two examples of this. Steve Rowe, the CEO at struggling Marks & Spencer was given a 48% pay rise from a 2016 long-term bonus payout. This coincided with a cut in staff bonuses. His total pay is £1.7m at a time when the share price is plummeting and profits are falling. I don’t see the justification for this at all. He was an internal appointment so it’s not even like an incentive that was needed to attract him to the role. It was given to him!

I appreciate if this turnaround at M&S works he’ll create a lot of value, by all means at that point give him a bonus. But, it should be bonuses for a job well done, as it is for everyone else. Not simply a bonus to further boost a huge pay packet.

Another example of failure is Iain Conn the ex-boss of Centrica. There’s no doubt he presided over an incredibly difficult time for the company. It’s impossible to know if anyone else would have created more value for shareholders but he should be red-faced with embarrassment at getting a 44% pay increase in the year before he stepped down. That stinks of a reward for failure. There’s little proof he has prepared the ground for a future turnaround.

Too often these top managers talk about strategies and ideas – which are often two a penny – but they don’t execute properly. This seems like poor management to me and should be called out as such and is underserving of huge bonuses.

Lack of proof big salaries do any good

My third main point is the proof that a larger salary leads to better decision making is inconclusive. A salary may attract a decent manager to a role, but large increases to that salary as well as massive bonuses do not meaningfully change that person’s motivation, ability or decision-making processes.

Can we really say Jeff Fairburn did anything exceptional at Persimmon for his £75m bonus? No. He ran the company well in favourable conditions and probably deserved to be CEO of a FTSE 100 company. But his bonus was simply a reflection of a broken system of executive rewards. One that still very much exists. Can we say Fred Goodwin’s huge pay led to better decision making? I’d suggest RBS investors in 2008/2009 would say no to that one. These are not isolated examples either.

Just as paying a footballer more doesn’t ensure they play well every game and score every penalty, simply throwing more money at CEOs makes no sense. It does not improve performance and therefore does not need to happen. Renumeration NEEDS to be linked to challenging long-term targets (10 years and more). Multimillionaires can afford to wait this long for the bonuses, while shareholders get more assurance that management won’t fiddle the numbers to meet short term targets.

Investors should be agitating for CEOs to be making the correct decisions simply because that’s there job. They do not need a bonus in order to make the right calls – it’s simply their duty. Just as a majority of workers in a company are paid their salary to do a job, so it should be the same for the C Suite.

As an investor in a number of FTSE 100 companies, I’d like to see the institutional investors take a far greater stance on this issue and call out failure as and when they see it. The gravy train must be stopped before it destroys confidence in the system which does and should bring wealth to all people.

Outstanding CEO’s do exist and I have nothing against a reward for success – it’s a perfectly natural part of a capitalist system. But the reward for failure along with a lack of skin in the game has the hallmarks of a gravy train that’s broken loose. The losers from any crash will be felt more by society and shareholders rather than the executives; as is too often the case when a business fails. The executives will be fine with their big houses and Ferrari’s.

If you are interested in corporate failures and to see some of the points being made here I recommend reading The Signs Were There by Tim Steer.

If you enjoyed this article please do read my previous one on why I prefer Reckitt Benckiser to its FTSE 100 rival Unilever. Or sign up by email on the homepage to receive alerts for future articles.

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