UK plc cannot thrive unless boardroom pay keeps up with America
The debate on executive remuneration is often emotive, but the consequences for falling behind are far-reaching.
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Boardroom pay is an emotive topic. In nominal terms, the remuneration of Britain’s top bosses appears to many as staggeringly large and at the annual meetings of UK plcs this year executive remuneration remained high on shareholders’ agendas.
Whether exceptional talent is properly rewarded has far-reaching consequences. The competition for talent operates at every level of the employment market and behind the headlines lies an important question for investors and the wider economy: are UK plcs paying enough?
Because of the challenges involved in comparing executive pay packages, the debate tends to throw up blanket assertions such as “US CEOs are paid more” or “the UK is losing talent to the US”. Among the wider public, the issue is more cultural: high pay tends to be more celebrated in the United States, whereas in Britain it is more often a reputational concern for businesses and individuals who fear the “fat cat” tag.
An objective view of the compensation divide between the UK and the US, our biggest competitor, is long overdue. At Schroders, where we invest on behalf of a huge range of shareholders, including some who are frequently critical of UK plc executive remuneration, we’ve developed an index analysing chief executive pay on both sides of the Atlantic.
Executive remuneration structures are complex and varied, making like-for-like comparisons nearly impossible. We have sought to standardise the data by considering business size and sector, local costs of living and tax.
Our study analysed the pay of 2,353 chief executives in the UK and the US. American chief executives are more broadly scattered across the country, so our sample covered thirty cities compared with four in Britain — Cambridge, Leeds, Manchester and London — which provided sufficient data for reliable analysis. We also excluded significant skew factors, such as the outsized pay of Tesla’s Elon Musk.
Before adjusting for company size, we found British-based chief executives were paid on average one fifth of their American counterparts. A New York-based chief executive, for example, takes home an average $7.2 million in expendable annual income, compared with the equivalent London chief executive’s $1.4 million.
When we factored in company size, the difference narrowed, but American chief executives still earned more than twice their British counterparts. The divide is particularly acute for small and medium-sized, globally focused companies in sectors such as technology, healthcare and consumer goods.
The size and dynamism of many US sectors is likely to attract talent at all levels of an organisation, offering opportunities to lead larger companies, take on more challenging roles and work within global enterprise clusters such as Silicon Valley. Add to that the pay differential and we think there is a risk that high-performing chief executives and other bosses could be tempted away.
Where do shareholders fit in? There is generally a significant relationship between compensation and shareholder returns in the UK, while in the US this relationship tends to be weaker. America’s chief executives often receive higher payouts with less stringent performance targets.
There’s a balance to be struck. We want to see a strong link between shareholder returns and chief executive pay. But we also believe that in many cases, especially where the firm is global or is operating in a highly competitive global sector, there is a case to pay more to achieve worldwide alignment.
We know that remuneration sums frequently are huge, especially in the light of comparisons with average worker pay, but we cannot shut down the compensation conversation solely on that basis. It is shareholders of UK companies and their beneficiaries — the savers, pensioners and others — who ultimately lose if UK companies cannot compete globally for talent. Being able to offer competitive pay in turn becomes part of what reassures domestic and international investors that UK markets are a rewarding place to put their capital.
This article was first published in The Times on 8 July 2024
- Read the full research here: CEO Compensation Index
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