Covid-related pay cuts for executive pay are ‘superficial’

Cuts in executive pay taken since the coronavirus pandemic are mostly superficial or short term, according to a new report.

The report by the Chartered Institute for Personnel and Development [CIPD] and the High Pay Centre says 36 FTSE 100 companies have announced cuts to executive pay in response to the COVID-19 crisis and economic downturn, but that the most common measure used – taken by 14 companies – has been to cut salaries at the top by 20% – which only makes up a small part of a FTSE 100 CEO’s total pay package.

Eleven companies have cancelled Short-Term Incentive Plans (STIPs) for their CEOs while two other firms have deferred salary increases for their CEOs. 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, says the report.

For the financial year ending 2019, the report finds that FTSE 100 CEOs took home a median pay package worth £3.61m – 119 times greater than the median earnings of a UK full-time worker (£30,353) – representing only a 0.5% decrease.

Eighty eight FTSE 100 companies paid their CEO an annual bonus in 2019, with total payments reaching £108.48 million. So-called ‘Long Term Incentive Plans’ (LTIPs) paid out at 81 companies, totalling £238.19m.

The report argues that when performance-related pay is almost guaranteed its value as a reward or incentive is greatly weakened. It adds that huge incentive payments also risk giving individual executives disproportionate credit for performance dependent on a much wider range of factors, such as the economic context or the contribution of the company’s wider workforce.

The CIPD and High Pay Centre say the findings underscore the need for reform to the remuneration committees that set executive pay. Building on the amended UK Corporate Governance Code 2018 they want decisions on top pay and bonuses to be more fairly aligned with wider workforce pay, and to incentivise other areas critical to longer term sustainability. This includes investment in training and improvements in company culture and diversity, as well as customer experience and the environment.

For the first time in the report’s four-year history, there are now more women FTSE 100 CEOs (seven) than there are CEOs called David/Dave (six), Andrew/Andy/André (six) or John (five). However, the mean pay for female CEOs (£4.02 million) is lower than mean pay of male CEOs (£4.74 million). The under-representation of black CEOs in the FTSE 100 is even more stark than the gender imbalance, says the report. While the Corporate Governance Code does not require firms to report the ethnicity of their senior management teams, other sources suggest there are currently no black British CEOs in the FTSE 100.  Among other recommendations, the report says the Corporate Governance Code should be amended to require publicly limited companies to report on the ethnicity of their senior management teams and their direct reports.

Peter Cheese, Chief Executive of the CIPD, said:  “We continue to find a disconnect between the total reward packages of CEOs in the FTSE 100 and their actual contribution to long-term company performance. Too big a share of CEO payments depends on the fluctuating fortunes of the stock market and not enough on whether they are a responsible custodian of the business for all stakeholders, including, of course, the workers who drive long-term value.”

“As well as other environmental and social factors, now more than ever, RemCos should be looking at wider workforce issues and organisational cultures to help them determine CEO pay.  Not only would this help incentivise CEOs to improve how their organisation invests and manages its workforce to support long-term performance, but it should make companies fairer and will help rebuild trust in business.”

Luke Hildyard, Director of the High Pay Centre think tank, added: “Very high CEO pay undermines the spirit of solidarity that many companies are trying to project as they battle against the impact of the coronavirus. More pragmatically, multi-million pound pay awards worth over a hundred times the salary of a typical worker seems like an unnecessary extravagance during a period of such economic uncertainty.

“If we want to protect as many jobs as possible and give the lower paid workers who have got the country through this crisis the pay rise they deserve, we will need to re-think the balance of pay between those at the top and everybody else.”

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