A new report shows that, while CEO pay is falling, there is still a huge divide between what senior managers are paid and the rest of the workforce.
Average pay for chief executives fell by 13% between 2017 and 2018, although CEOs are still paid on average more than 117 times the average full-time worker, according to an annual analysis of executive pay.
The analysis by the Chartered Institute for Personnel and Development and the High Pay Centre think tank also found that 1,394 ‘key management personnel’ across the FTSE 100 are paid an average of £1.5 million each.
The report shows FTSE 100 CEO median pay has fallen by 13% from £3.97 million in 2017 to £3.46 million in 2018. The average (median) UK full-time worker earns £29,574. The report points out that it would take the average (median) FTSE 100 chief executive just three days to earn this amount. The report says the fall in pay is likely to be due to a combination of factors including the possibility of greater restraint on high pay, variable corporate performance and the cyclical nature of pay-outs. However, 43 CEOs in the FTSE 100 saw their pay increase between 2017 and 2018.
Part of the issue is the complex nature of long term incentive plans. The report also highlights the disparity in pension contribution payouts to CEOs compared with the average employee. As a percentage of base salary, CEOs get a pension contribution (or payment in lieu of) worth 25%. By contrast, employees get a contribution worth 8% of their wages.
Some 64% of workers agree that CEO pay is too high in the UK, with just 4% disagreeing that this is the case. The report also points out that while women make up 6% of the FTSE 100 CEOs [just six CEOs were women in 2018], they earn just 4.2% of the total pay. However, it says this is a slight improvement on last year when the then seven female CEOs earnt just 3.5% of total pay.
For the first time, the CIPD/High Pay Centre extended its analysis to consider the FTSE 250, the 250 organisations listed after the FTSE 100 on the London Stock Exchange. It shows that, in contrast to swings seen across FTSE 100 pay in the last three years, median FTSE 250 CEO pay has remained relatively steady. It was £1.58 million for FYE 2016, rose by 2% to £1.61 million the next year, and dropped back down to £1.58 million in 2018.
This year’s analysis also looked at the pay for ‘key management personnel’ for the first time, typically board members and senior managers, although there was significant variation in reporting. It says more than £2.08 billion was spent on FTSE 100 key management personnel remuneration in 2018, “dwarfing” the £465.4 million paid out to FTSE 100 chief executives. However, there is a lot of variation. Some individuals earn more than CEOs while others earn significantly less.
The report adds that shareholders tend to vote through remuneration packages and that shareholder ‘say on pay’ is having little effect on restraining top pay.
Peter Cheese, chief executive of the CIPD, said: “Fairness is one of the biggest challenges facing society today. The gulf between the pay at the top and the bottom ends of companies is slightly smaller this year but it’s still unacceptably wide and undermines public trust in business. We must question if CEOs are overly focused on financial measures and are being incentivised to keep share prices high rather than focusing on the long-term health of their business. Being a custodian for the business and its people over the longer term must surely be a chief executive’s ultimate duty, rather than simply focusing on short-term gain.
“We need to challenge excessive pay, especially when too often it doesn’t match up to company performance. Boards, and remuneration committees in particular need to review how they reward their top executives. They need to ask if it is fair when set against the overall reward strategy and practices of the organisation and if it is warranted in terms of performance. After all, success is the collective endeavour of the many, not just the few at the top. And that point has never been more important in these times of significant uncertainty.”
The report makes a number of recommendations, including extending reporting requirements to the top 1% of earners to improve transparency, broadening the remit of remuneration committees to consider wider workforce reward practices and understanding of organisational culture, fairness and investment in people as well as simplifying CEO reward packages and linking CEO pay to both financial and non-financial measures of performance, such as workforce and organisational culture.