Are CEO's paid too much?.... no they're not!

Whilst I appreciate this is something of a controversial statement, I will attempt to clarify my thoughts and equally I don't think CEO's can be lumped into one category and judged accordingly.

I attended a fascinating seminar on the concept of exec pay last week hosted by the London HR Connection. They had assembled a skilled panel of professionals within the Reward arena, to give their thoughts on the thorny issue of executive remuneration. Whilst there were some great insights, I had to put my hand up at the end to comment that perhaps they had danced around the subject and that we hadn't really got to the crux of the issue. No one had really answered the question "Are executives paid too much?", so I therefore thought I would give it a go!

My father and I argue about this topic regularly as he reads the FT and was quite quick to tell me several of the FTSE 100 CEO's pay packets and how appalling they were, and how their companies hadn't actually performed well to merit such large awards. This for me really is the crunch point of the debate. In my opinion everything we read in the press about executive pay is arguably misreported. The damning comments levied at execs across the media are always about publicly listed businesses. Someone has had a tip off about a low shareholder vote (usually 65-70% approval!?!) and decided to report it as a “shareholder revolt”, or the other one is usually about how a CEO 'asked' for a 15% pay rise despite his company making lower profits than forecasted. The one that really gets to me is when a report is purely around the bonus figure of an exec, simply because it sounds like an overly excessive number.

When I am presented with these kinds of articles, my instinctive reaction is that these companies have no real case to answer, as the bonus payments are simply a result of remuneration policies that were fundamentally voted for and put in place back in 2013. The department of Business Innovation and Skills (BIS) made shareholder votes on remuneration policies binding back in 2013 and as such there should be no real surprises when it comes to the proposed remuneration of an executive team. Regardless of public perception, any bonus awarded for publicly listed companies are in line with the companies approved remuneration policy, which fundamentally lay out " if the company performs at X, you (the CEO) will receive Y". This was the case for BP, Burberry, Kier group and WPP, or any of the other salacious stories presented around exec remuneration at a listed company. The CEO didn't decide the amount himself and they certainly didn't pluck numbers out of thin air, which is arguably why most of the votes on the Directors Remuneration Reports (DRR) at these companies have been voted through often with a firm nod from the ISS (institutional shareholders services inc).

The whole point here is that the question around exec pay and whether they are paid too much is a slightly moot point. For listed companies, I would argue that, no, CEO's aren't paid too much, because they have an army of shareholders scrutinising their potential comp and deciding if they think it's a fair and reasonable, way before its ever received. In that case, regardless of the award made it is somewhat irrelevant as these were policies put in place by others who represent the interest of the shareholder, which is surely what the government wanted when they made shareholder votes binding? Just because a bonus number sounds big doesn't mean it is unjustly received, especially if you didn't decide it yourself? However, there is a separate argument, which I do support, around the concept of performance management and what the CEO personally did to contribute to the company’s fortunes. This is something that has remained relatively unmeasured or overly complex in some cases, but I appreciate it is hard to assess. If a CEO receives a ￡50 million bonus, regardless of adhering to the policy around his remuneration, what did he/she do to warrant that? Just because the share price may have trebled in the last three years, is that down to the CEO or were they in the right place at the right time in a conducive market?  Whilst the assessment of contribution is definitely a point of debate I think it is fair to argue that a CEO in a listed firm can’t really be paid too much as it’s something that is completely out of his/her hands?

My main concern are the executives in private companies and the pay levels they receive. With the financial services community now regulated to within an inch of its life on the concept of remuneration, it is actually the unregulated industries that worry me most. Virtually every loop hole has been closed across banking, asset management and private equity firms’ post-recession in line with the “never again” slogan coming from the government. But for a private firm outside of this arena some of the pay practices I come are across are archaic and worrying. I appreciate that private companies are private companies, therefore one could argue that they aren’t doing any harm and what right does anyone have to tell them how to allocate their revenues?

However, when I sit in front of a Head of Reward within a private media company of 3000 staff whose CEO fundamentally paid himself ￡18 million, whilst they froze pay rises across the rest of the company due to “cost constraints”, it doesn’t sit particularly well with me. Or the unease I felt when talking to a commodity trading firm who paid a member of staff ￡67 million last year for his trading efforts, of which all of it was in cash and only 10% deferred. The money being paid out, without measure or in some cases justification should be the real concern, rather than scrutinising banking bonuses which are in reality capped. I read with dismay last year about a CEO’s pay at one of the UK’s biggest banking organisations, who received a total comp of ￡7 million for the year, and how dare he receive such an outlandish sum of money. Of course ￡7 million is a lot of money, more than I can possibly imagine receiving, but I can’t help but think that this pales in comparison to some of the undisclosed pay packets out there. When you are the CEO for a UK bank that is responsible for over 100,000 employees and an important cornerstone of the UK economy, ￡7 million doesn’t upset me compared to a CEO in a small private firm rinsing his companies revenue’s whilst the employees go without.

So what power does the government have to do anything about private company pay? In short very little, but that doesn’t mean that nothing can be done. Whilst BIS are no doubt considering making shareholder votes on DRR’s binding, perhaps exec pay disclosure would be an idea worth considering. Many large corporates when selecting a law firm to represent them, will now consider their CSR work, carbon footprint, and diversity as a metric of assessing their suitability. I would argue that perhaps they should be looking at a law firms gender pay reporting, or asking them to report on CEO pay as an average of employee pay, or maybe even breaking down their reward philosophy and how they incentivise staff at all levels to get an idea of the real ethics of the organisation? Some of the most antiquated pay practices come out of the professional services firms who ironically advise large listed businesses on how to responsibly pay their executives to get through a shareholder vote!

So, when someone asks me the question are CEO’s paid too much, my first answer is always a resounding “no”. In listed firms in the UK, they are paid in accordance with clearly laid out remuneration policies and when shareholder votes on annual Director Remuneration Reports also become binding, then it will be nigh on almost impossible for a CEO to be paid too much money! Outside of this I would argue that some CEO’s in the private sector are paid a ludicrous amount of money that goes beyond the realms of what is ethical, decent or reasonable. How to curtail that is a whole separate debate and whilst I have an opinion, I certainly don’t have the answer. What I would say is that perhaps we should take the salacious articles written in the press about exec pay with a slight pinch of salt. Nearly every article written, is about listed company pay and designed as click bait rather than actual insightful reporting on the topic.

For any thoughts or queries on this or the Reward market in general do feel free to get in touch with me at [email protected] or 0207 337 7618