The pay divide

If you want to know how much the average big company boss has earned since January, a counter on the High Pay Centre’s website ticks over at alarming speed. It had reached £2.38 million by the end of the third week in June.

In contrast, the average UK worker takes home £27,645 a year. Since April no fewer than 21 FTSE chief executives have faced shareholder revolts over their pay.

Companies like BP, where 59.2 per cent of shareholders voted against a £14 million package for chief executive Bob Dudley; Centrica, where 15 per cent voted against a £3 million package for new chief executive Iain Conn; Smith & Nephew, where 53 per cent voted against its remuneration report; estate agents Foxtons, where one fifth voted against a 19 per cent pay rise for boss Nic Budden; Paddy Power Betfair, where 31.8 per cent voted against a new executive pay structure; and WPP, where one third of investors opposed Sir Martin Sorrell’s £70 million package, have all been in the firing line.

Indeed, Deborah Gilshan, corporate governance counsel at the Railways Pension Scheme, described pay at WPP as ‘a risk to its reputation and its licence to operate’. With some of the UK’s biggest companies still to hold their annual meetings, the chances are that tally could rise.

It seems that the issue of executive pay – always of interest to the media – is moving from bubbling to boiling point. According to the High Pay Centre, the independent think tank set up to highlight the disparity between executive pay and the salaries of ordinary workers, the average pay of a FTSE 100 chief executive totals £4.96 million a year.

Tim Johns, a senior adviser at Hudson Sandler and a former director of communications at Sainsbury’s, Unilever and BT, says:  ‘It’s a bit like London house prices where everyone recognises the issue but no one is prepared to make the first move and shave £200,000 off their asking price for the good of society.’

Like the High Pay Centre, Johns thinks that the gap between those at the top and those at the bottom of organisations is now so wide that it is becoming indefensible. For many companies, it is a topic that is taking up more and more of corporate affairs directors’ time and also one of the issues that is most difficult to resolve.

It is also an issue that new Prime Minister Teresa May has put at the top of her agenda.

‘This is an example of the law of unintended consequences. In the late 1980s shareholders thought it was important to have skin in the game and so created long term incentive plans, that linked rewards to the growth of the business,’ Johns says.

There may be links, but the amounts that chief executives are making are so high – £23 million for Rakesh Kapoor at Reckitt Benckiser and £14 million for BP’s Bob Dudly – they are becoming unsustainable.

It’s a bit like London house prices where everyone recognises the issue but no one is prepared to make the first move and shave £200,000 off their asking price for the good of society

Johns argues that corporate affairs directors need to see the anger at executive pay as a real risk to the business. ‘Their job is to hold a mirror up to the organisation and to bring the outside in. This issue is just like sugar or climate change or child labour. Companies are running a real risk by ignoring it,’ he says.

So what could happen? Largely this year, the advisory votes that institutional shareholders have cast are non-binding. But following a change in the rules brought in by the Coalition business secretary Vince Cable, companies have to hold a binding vote every third year. Politically attuned corporate affairs directors should be pointing to the massive breakdown in trust of elites and advise their companies that further legislation could easily be in the offing.

Matt Carter, chief executive of communications consultancy Message House, says there are three distinct groups raising flags – and all for different reasons. ‘There are those who want better capitalism and better returns, and are frustrated and angry at the gap between high pay and low success. Essentially they want the executives to do a better job.

‘Then there is a different group who want fairer capitalism. They want to close the gap between the people at the top and those at the bottom, which has grown rapidly in recent years.’

Finally, Carter identifies a third group, who are raising concerns about executive pay as part of wider discontent with the strategy and leadership of a company. This is a reflection on a company’s leadership, rather than pay specifically.

Companies like Sports Direct – whose chief executive Mike Ashley has had many battles over pay – come into this category. But big banks, like HSBC and Barclays, have also received challenges for similar reasons. ‘Rule changes have given the shareholders the tools to criticise the leadership over their corporate decision making and scandals that have occurred,’ Carter says.

Carter suggests that all types of opposition to executive pay are feeding into the wide debate, but most shareholder revolts are about the first concern: where poor financial performance and return for shareholders are the primary triggers.

‘The biggest worry for businesses is that this is one of those unholy coalitions that comes together to pursue change although the outcomes that they want are very different. It is possible that they may be able to influence legislators,’ Carter says.

In general, however, companies appear to be faltering and not tackling this issue well. Largely, that is because it is so very personal.

The result: companies move very slowly and even attempt to avoid responding at all, just because it is so difficult. At the Reputation Institute, measuring the nuances of consumers’ perception of companies is a daily business.

Whether a company’s reputation declines because it is seen to be overpaying its chief executive is far from clear. ‘This is an issue that has been ongoing and we see it having some degree of reputational impact as far as leadership is concerned,’ Ed Coke, director of consulting services at the London office of Reputation Institute. ‘Executive pay does become a bit of an issue, if it is expressed as part of the systemic culture of an organisation.

‘If people see executive pay being out of line with overall behaviour – it can negatively impact scores for openness, transparency, fairness and accountability.’

But if you are communicating well, it needn’t be a problem. WPP has been much criticised for paying its founder and chief executive Sir Martin Sorrell a pay packet of £70.4 million, bringing his total remuneration to £190 million since 2009. However, WPP scores highly on Reputation Institute’s measures because Sir Martin and the company have explained very clearly and patiently why the chief executive is receiving such a high pay packet.

‘These were justifiable rewards that have been explained in an open and transparent manner,’ Coke says. Sir Martin’s payout was based on share awards dating back to 2010 when the share price for WPP was 644p; today it stands at more than £15.

If people see executive pay being out of line with overall behaviour – it can negatively impact scores for openness, transparency, fairness and accountability

The lesson here is that if executive pay is in the line of sights of campaigners, then the company needs to address it head on. However bonus structures often cause confusion and can be used to obscure what is happening.

Meanwhile, if you are in a company, like Sports Direct, with questionable governance – a row over executive pay will only serve to weaken your governance reputation and could harm other aspects of reputational capital as well.

‘The public sees it as an integrated issue. Concerns over openness and transparency can also cause product concerns,’ Coke says.

Rupert Younger, founding director of the Oxford University Centre for Corporate Reputation at Said Business School, points out that debate around pay has been around for thousands of years, not least among Venetian traders and the so-called Robber Barons of late 19th century America. ‘The tense relationship between business and the people normally breaks in times of economic hardship resulting in revolts,’ he says. The elite and privileged of our society are under the microscope – as has been seen in the run up and in the result of the EU Referendum.

‘Focus has turned on them because of the economic outlook. Also, some of the greatest rewards have been in the financial sector – which was only very recently the subject of a huge taxpayer bailout and shouldered a large degree of the blame for the financial crisis,’ Younger says.

Another problem, he points out, is that executive pay only seems to go one way. Certain groups of people never seem to lose. ‘That sense of inequality grates with everyone,’ he says.

The big difference between current dissatisfaction with executive pay and that in centuries gone by is that we know so much more about what people are receiving, due to the transparency afforded by the internet. ‘What was invisible is now more visible,’ Younger says.

Andrew Wilson, founding partner of Charlotte Street Partners, agrees that it was the big privatisations of the 1990s and then the banking crisis eight years ago that has put executive pay firmly on the agenda for the media. Wilson says companies are struggling everywhere to deal with this.

‘You can’t win a reputational discussion on this so it has to be addressed.  Companies need to look at how they incentivise staff at every level.’

He points to the Payment Protection Insurance mis-selling scandal as a problem in pay, that caused fundamental damage for shareholders. Banks boosted their profits through selling PPI but they lost more than they ever made from it, in compensation and fines, when the scandal was uncovered.

‘Companies need to ask fundamental questions about what they are there for and how do they properly reward staff, the management and the shareholders. I would put executive pay in the same risk category as corporate taxation. These issues are now being exposed because of the availability of information,’ Wilson says.

You can’t win a reputational discussion on this so it has to be addressed.  Companies need to look at how they incentivise staff at every level.

Some companies will be addressing these questions because, like BP and Barclays before it, they are in the teeth of a crisis. ‘No matter who you are, this will come and hit you,’ Wilson says.

‘If you are lower down the FTSE, then it’s a very good idea to get this ship shape because very good fund managers will be looking at [executive pay] alongside everything else,’ he says.

Directors of communication, he advises, need to be at the centre of those discussions. ‘This can’t be managed just through the human resources or legal perspective. If companies don’t take notice of what the comms director is advising, they may lose their licence to operate in the long term.’

In June, Sir Philip Green was made to look small by a committee of MPs who scrutinised his role in the sale and subsequent collapse of BHS on behalf of constituents. Public companies should have taken note, Wilson argues. ‘The public sector – regulators and MPs – is flexing its muscles and thinks nothing of bringing in private companies to answer tough questions in public now,’ Wilson says.

Tony Langham, chief executive and co-founder of Lansons, agrees that pay is now an issue for every company, as public debate over increasing inequality in society has bubbled over. He suspects that a certain type of shareholder – local authority pension funds, the Church, teachers’ pension funds – are gearing up for a fight.

‘I think we are going to see a greater proportion of investors who express views beyond the parameters of financial performance,’ he says.

In future, where reputational damage occurs, there may also be greater scope to claw back a chief executive’s pay. It was a huge concern at Thomas Cook that former chief executive Harriet Green received a large bonus, because the share price of the company and its balance sheet had improved under her tenure, that did not take into account her poor handling of the deaths of two children on a Thomas Cook holiday in Corfu, which caused significant reputational damage.

In June, a committee of MPs suggested that chief executives who fail to prevent cyber attacks and loss of personal data should also have their pay docked. Make no mistake: the days of sweeping that difficult conversation with the chief executive under the carpet are well and truly over.

This article first appeared in issue 107