Executive Earnings “Holding up Growth”, say Investors 

Asset owners and managers highlight failings of and seek solutions to “unfair, broken system”. 

The executive pay system across the world is broken and is undermining both trust in large-scale business operations and the prospects for economic growth.

Among the most egregious features of the way top pay is handed out include the lack of any proven link with performance, the inbuilt ratchet pushing rewards ever higher and so-called bonuses unconnected with any achievement that simply come up with the rations.

These were among the findings and observations of a summit on executive pay attended by investors and others on December 14 and organised by the Church of England Pensions Board CoEPB).

Asset owners, managers and pay experts agreed that the present system is failing, but there was less consensus on the way forward. Some favoured putting worker directors on boards, others restructuring incentive schemes and there was one suggestion that CEOs ought to be treated as workers, rather than as special beings, from a remuneration perspective.

The cost-of-living crisis and its impact on ordinary employees at the companies concerned has heightened the issue, according to Adam Matthews, Chief Responsible Investment Officer at the CoEPB and summit host. “It is not for investors to set executive pay, although we can have a view on it,” adding that the accountability of remuneration committees was one of several areas requiring further scrutiny.

Long term incentives, short-term focus

In November, professional services firm PwC reported that executive pay at FTSE 100 companies was largely back at pre-pandemic levels. It found that the average total pay of CEOs increased from £3.2 million in 2020-21 to £3.9 million in 2021-2022, primarily driven by an increase in annual bonuses. The proportion of CEOs with salary freezes was down from 43% in 2021 to 15% in 2022.  

Long-term incentives plans (LTIPs) may be part of the problem, according to Ola Peter Gjessing, Lead Investment Stewardship Manager at Norges Bank. Criticised in some quarters for encouraging short-term management behaviour as executives aim for pre-set targets, LTIPs could be replaced by deferred equity in the business concerned, he said, thus better aligning the interests of top management and shareholders.

Gjessing added: “We probably all agree that we are prepared to pay well for effective leadership. But is there a risk that monetary incentives are crowding out other motivations?

“Executives generally want to do a good job.”

For years, it has been argued that higher executive pay stimulates performance and that there is an international market for top managers in which companies have to bid up earnings in order to secure and keep the best people. Simon French, Managing Director at investment bank Panmure Gordon disputed both these propositions.

There was, he said, no evidence of a link between pay and company performance, claiming the pandemic, with its partial fragmentation of the executive labour market, had weakened the argument of “international arbitrage for executive pay”.

Risk of complicity

French added that the poor distribution of incomes across the social scale is an obstacle to economic growth, not least because it lowers the likelihood of lower-paid people spending rather than saving.

Luke Hildyard, Director of the High Pay Centre think-tank, urged the appointment of worker-directors to boards, but this did not meet with universal approval. Caroline Escott, Senior Investment Manager at Railpen, which manages £35 billion AUM on behalf of railway retirement schemes, said such a director could have a powerful role to play in relation to remuneration questions, but would not be right for all companies.

“We don’t think that a workforce director should be mandatory,” she said.

Deborah Gilshan, a corporate governance and sustainable investment expert acting as adviser to the summit, added: “We already have a worker on the board: the CEO.” It was time, she said, to start seeing chief executives in that light.

Were investors to fail to bring about a better system of executive pay, she said, they risked being seen as complicit in the existing one.

“The system is broken”

From Australia, Ed John, Executive Manager for Stewardship at the Australian Council for Superannuation Investors, said his experience suggested the UK didn’t always successfully produce sustained engagement between boards and asset owners. “It is not always a two-way conversation and can elevate policy over substance.”

Aeisha Mastagni, Portfolio Manager for Sustainable Investment at the California State Teachers’ Retirement System, said performance-related pay structures had become ever-more complex. “It’s always about pay for performance until there’s no more performance and it seems were are just sending money out the door to these individuals.

“At the moment the system is broken.”

Lindsey Stewart, Director if Investment Stewardship Research at Morningstar, said UK investors were much more likely to raise questions about executive pay than their US counterparts. “It surprised me how different attitudes are over here,” he said.

The pandemic showed how the value of jobs has been de-coupled from the rewards, according to Janet Williamson, Senior Policy Officer at the Trades Union Congress. “Pay gaps over-reward those at the top and under-reward those at the bottom,” she said.

“Fixing executive pay is important but on its own it won’t fix low pay.”

Investors are expected to outline tactics and priorities in due course and greater collective action is a possibility, given the collaborative approach taken in other areas of engagement.

The CoEPB’s Matthews said one approach could be for investors to seek a binding, rather than advisory, vote on the outcomes of pay policies. 

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