07 June 2016 by Alexandra Jones
The perennial issue of executive remuneration
Following the AGMs of some of the largest companies in the FTSE, the perennial issue of executive remuneration is yet again making headlines. Exactly what fair pay means is highly contested.
A lack of consistency across companies – even those within the same sector – lacklustre attempts to effectively tie pay to performance and varying attitudes of stakeholders towards the issue all ensure that the problem continues.
In this issue, Peter Montagnon warns about the high price for lavish executive rewards. He explains how if the gap between average and executive pay continues to widen, ‘there will sooner or later be yet more pressure to rein in remuneration with more regular, unhelpful public conflict between companies and shareholders and the prospect of yet more damaging and ill-conceived regulation’. He also adds that failure to curb pay will eventually damage trust in business further. See the full article, 'The cost of lavish rewards'.
We have also seen recent examples of companies testing the limits of what is deemed acceptable. Whatever your view on the issue, most would agree that the £70 million pay of WPP Founder and CEO Martin Sorrell, verges on the unacceptable.
In this issue, Simon Osborne describes this as ‘eye-watering’, suggesting that pay packages have exploded in recent years to a point that they are unsustainable (see 'An explosion in pay packages'). He leaves us with a stark question in the Sorrell case: ‘what on earth will they have to pay his successor?’
It is safe to say that most understand that these individuals are at the very top of their respective professions and they deserve to be handsomely rewarded for their contribution to the companies that they lead. Yet, the problem arises when seemingly limitless rewards remain in place in spite of how well the company is performing.
That is not to say that this issue would be solved by intrinsically linking pay to share price. In a recession or market boom, companies’ fortunes do not rely only on how well the CEO has performed.
To make an executive’s remuneration a true representation of the work they have done, a more holistic view is needed – which takes into account all aspects of performance and benchmarks against competitors.