Executive pay outstrips performance in FTSE 100 companiesPublished Sat 7 Jan 2012
New analysis from the think tank IPPR suggests that executive pay increases are not justified by the performance of their companies. On average, total CEO remuneration increased by 33 per cent, while the average increase in company value was 24 per cent. IPPR's new analysis looks at CEO reward packages and company value in 87 companies in the FTSE 100 over 2010/11.
On average, CEOs in the 87 companies took home £5.1 million in basic pay, bonuses, share incentives and pension contributions. But changes in remuneration of chief executives and the value of FTSE 100 companies have no statistical relationship.
The government is expected to publish its plans for tackling excessive boardroom pay next week but IPPR says that reforms must go beyond 'shareholder activism' if they are to both slow the rise in top pay and ensure that employees get a fairer share of the rewards when companies do well.
IPPR's analysis found large differences in CEO pay and company value across the FTSE 100 sectors:
- Bank bosses enjoyed an average increase in remuneration of 81 per cent, but the value of the five banks in the study rose by 19 per cent.
- CEO remuneration in the media sector rose by 80 per cent while average company value increased by 26%
- Company value increased by 19 per cent in both the insurance sector and support services - but CEO remuneration rose by 40 per cent in insurance, compared to just 16 per cent in support services.
- Tobacco producers and oil and gas companies both produced an average 14 per cent increase in company value - yet CEO rewards fell by 11 per cent in oil and gas, while rising by 68 per cent in tobacco.
Nick Pearce, Director of IPPR, said:
"This new analysis confirms that boardroom pay is running far ahead of company performance in many of the UK's major businesses. Attempts to link pay to performance haven't worked well because it's hard for shareholders to monitor the performance of individual executives. Instead, pay deals for top earners have become increasingly complex as well as increasingly generous.
"Tackling excessive top pay should include steps to ensure that employees get a fairer share of rewards. To reflect the contribution that all employees make to company success, we should make sure that employee representatives sit on remuneration committees and that boards report to all staff annually on pay levels across the company."
IPPR research to be published later this month will show that 'shareholder activism' by itself is not enough to tackle unfair pay in UK companies:
- Greater shareholder scrutiny of top pay deals relies on institutional investors like pension funds and insurance companies. However, they only own just over a quarter of UK shares. Over 40 per cent of shares in UK listed companies are owned by organisations and individuals outside the UK.
- Shareholders, even UK institutional investors, are increasingly holding shares over shorter time periods, making it difficult for them to have oversight of the long-term interests of a company.
- Shareholders rarely reject directors' remuneration reports - only 5.6 per cent of remuneration reports in FTSE All-Share Index companies were voted against by shareholders in 2010.
Instead of relying purely on shareholders and non-executive directors to reign in executive pay, IPPR argues that the government should introduce reforms that help employees have a greater say in how pay and reward is organised within their company. This could include requiring boards to have at least two employee representatives on their remuneration committee, as recommended recently by the High Pay Commission, and requiring boards to report annually to staff on pay and reward across the company.
Notes to Editors
This briefing is based on an analysis of data collected by One Society. All data relates to company year ends between 30 June 2010 and 31 March 2011. Considerable variations exist in the way that companies calculate and report executive pay and companies are not required to publish a single figure for total CEO remuneration - the figures in this analysis include some assumptions about CEO remuneration. Figures for total CEO remuneration include: basic salary, annual bonus, pension supplements made as cash payments; pay-outs for CEOs who left the company in the financial year; other benefits such as relocation payments and housing allowances; pension contributions made by the company; long-term share incentives (estimated total value of shares allocated in respect of the financial year); estimated value of share options awarded in respect of the financial year, not past options exercised that year. Estimates of incentive-based payments are derived from the value of payments awarded (rather than received) during the financial year. Company value refers to market capitalisation, which is just one measure of company performance. Market capitalisation was calculated using the data for the month end immediately prior to the beginning of the company's reporting year and the month end immediately prior to the end of the company's reporting year (using London Stock Exchange records). A small number of companies were excluded from the analysis due to difficulties in identifying accurate data or because the CEO was not in post for the full two years under consideration.