Posted by Deborah Rees-Frost on 16 December 2014
Has executive pay got out of hand?
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After reports that executive pay has now reached 180 times that of the average employee - is there a case to support such high salaries?
It’s easy (and lazy) to look at absolutes in Executive Pay, but comparing today’s top companies with those of 20 years ago is of limited value as they have changed beyond recognition.
The FTSE 100 now is an international index and the size and complexity of businesses means that the chief executive might be running the equivalent of 100 companies of the size of those in the 1980s index. In terms of work done by lower paid employees though – well that’s not always changed so much. Tesco’s chief executive is now running a bank, a legal firm, a media and internet provider and an on-line and digital business, as well as its pre-existing retail and fuel operations. But life isn’t much different for a Customer Service assistant than it was in the 1980s – so pay there hasn’t changed as much relatively.
Executive remuneration has recently focussed on long-term rewards, which align shareholders and executives by making bosses take a big part of their remuneration in shares.
So when the FTSE 100 rises, so does the package of the executives of FTSE firm executives; they are the same side of the coin. However, what is invisible in the comparison is the executive pay of companies who underperformed and fell out of the FTSE 100.
Like the Premier League, companies are relegated from and promoted to the FTSE 100 depending on shareholder performance. Relegated execs will not get the share element of their package as they failed on performance. To put this in context, generally two or three companies fall out of the FTSE every quarter. This means that over a three-year period (the length of many long-term incentive plans), about a third of the FTSE 100 will have been relegated and replaced by better performing companies.
If you look at the aggregate pay of just the FTSE 100, you are simply criticising the corporate equivalents of José Mourinho and Arsène Wenger, and ignoring thousands who perform every Saturday in leagues all over the UK.
