UK CEOs pocketed big bonuses. Why?


Like many people, UK CEOs have had a tough pandemic. Unlike a lot of people, they come out strong. A series of surveys have shown that the salaries of business leaders are rebounding to meet or exceed pre-Covid levels. The latest, from PwC this week, pegged the average total annual compensation for FTSE 100 CEOs at £3.9m ($4.5m), an increase of more than 20% mainly due to bonus payouts . It strikes a dissonant note in a recession-bound economy where nurses plan to retire on a bid below inflation.

CEOs could say they’ve earned their boon. After crashing during the initial lockdown phase of the pandemic, when many executives took pay cuts as millions of workers were laid off, corporate profits have more than recovered to be comfortably higher than at the end of 2019. In the private economy, it’s up to owners to decide what they think their managers are worth. If shareholders are satisfied with the performance of their hired agents, then who should argue? The data suggests that they are indeed satisfied. Boards received 95% of votes in favor of compensation reports, according to PwC research, which is based on 97 published by FTSE 100 constituents and presented for approval during annual general meeting season 2022.(1)

Why they are so happy is a little harder to explain. Some 15% of CEOs were still subject to a pay freeze this year, up from 43% in 2021. Additionally, 38% received a lower percentage increase than the overall workforce, 56% having obtained a raise in line with the employees. These are the bonuses that deserve a closer look. These paid higher percentages than before the pandemic, according to PwC (which did not name individual companies). While this was driven by a post-Covid boom in some sectors, in others it reflected “performance targets that were set conservatively in 2021 to reflect greater market uncertainty”.

In other words, everything went pear-shaped when Covid hit, so companies lowered the bar for their CEOs. When things returned to something close to normal, those down targets were easily hit. The asymmetry is clear. Leaders were not responsible for the devastation of a once-a-century global pandemic and therefore did not deserve to be unduly penalized for something beyond their control. But they weren’t responsible for ending the pandemic either, so did they deserve to be so generously rewarded for the recovery? Tails I win, tails I don’t lose.

What makes shareholder acquiescence more difficult to understand is the FTSE 100’s continued inability to break out of its relative underperformance rut. Earnings may have recovered, but market performance has not. The S&P 500 has provided a total return, including reinvested dividends, of almost 30% since November 2019, even after this year’s correction, while the MSCI World Index has returned around 20%. Anyone who invested in the FTSE three years ago saw no gains, at least in US dollar terms.

Under the liberal market orthodoxy that has prevailed for nearly half a century in the UK and the US, excessive executive compensation should not be cause for concern. Companies theoretically compete in a free market for the best talent available, and the rewards for their leadership will justify what is paid. (Conversely, companies that make bad hiring decisions will suffer the consequences; in any case, the market can be trusted to decide.)

In truth, this theory has been depleted for decades, eroded by a growing number of academic publications and amid increased attention to the widening gap between the 1% (or 0.1% or 0.01%) of the highest paid and all the others. In the United States, the ratio of CEO pay to that of the average worker has risen from 20 in the mid-1960s to 399 to 1 in 2021, according to the Economic Policy Institute, a labor-affiliated think tank. In the UK, the one-measure ratio was much more modest at 109 to 1 last year. Either way, it’s hard to believe that CEOs have really risen in value relative to the average worker.

One of the theories as to why CEO pay continues to rise in defiance of apparent economic and market logic is known as the “Lake Wobegon Effect”, named after the TV host’s mythical hometown. radio station Garrison Keillor in Minnesota, where “all the kids are above average”. No company wants to acknowledge having a below-average CEO, prompting everyone to pay more or at least match the median of comparable companies. This fuels a perpetual upward wage spiral.

The liberal approach to CEO compensation is tied to the concept of shareholder value — the idea that a company’s sole objective should be to maximize the wealth of its investors. But this philosophy is losing its influence after decades of growing inequality. More and more UK companies are including environmental, social and governance, or ESG, objectives in their incentive plans for chief executives. This in itself is a recognition that companies have broader societal obligations beyond strict legal requirements.

The zeitgeist is changing. Since 2019, all listed companies with more than 250 employees in the UK have been required to publish the ratio of the CEO’s pay to the salaries of his local workers at three different levels of the pay scale. “We will improve incentives to tackle the problem of excessive executive pay and rewards for failure,” reads the 2019 election manifesto – not from the socialist-leaning Labor Party, but from the Conservative Party. in power, for which free enterprise is a guiding principle. Inequality is perceived today less as a question of social justice only, but also as a problem of the functioning of capitalism. Unlike the doctrine of free markets and deregulation that helped widen income disparities from the 1980s, a more even distribution of wealth can be good for economic growth.

UK compensation packages are, admittedly, modest compared to those in the US, where you’d need over $250 million even to break into the top 10 (Tesla Inc. founder Elon Musk topped the lot last year after exercising $23.5 billion worth of stock options The Economic Policy Institute excluded him from its 2021 survey because he allegedly skewed the data too much). But then the United States produced top tech giants and consistently superior stock returns.

The UK has no such consolation, only a cost of living crisis and a budget crisis to worry about. Under these conditions, the CEO’s salary windfall seems increasingly out of step with the times.

More from Bloomberg Opinion:

• Have Keystone Cops in the UK reached their peak yet? : John Authers

• Consumers begin to crumble under inflation: Andrea Felsted

• Wall Street bonuses contain inherent risk: Jared Dillian

(1) Investment trusts have been excluded.

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Matthew Brooker is a Bloomberg Opinion columnist covering Asian finance and politics. A former editor and bureau chief of Bloomberg News and associate business editor of the South China Morning Post, he is a CFA charterholder.

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