Why CEO pay is still accelerating, but can not continue

Wednesday, June 13th, 2012 - Executive Appointments, Executive Job Search, Executive Recruitment

Why CEO pay is still accelerating,

but can not continue

I have written before about the subject of Executive Pay in various posts, including most recently in the post Package NOT Pay, which was on the subject of RBoS CEO Stephen Hester’s share bonus.

But even in this current difficult western economy, CEO pay is still rising: why?

A survey this week by proxy voting agency Manifest of FTSE CEO’s remuneration packages concluded that:

• On average, their package amounted to £4.8M
• This was a 12% rise on 2010
• That is more than five times the increase in average earnings

BBC Radio 5 Live undertook a street survey, to find out if the public were aware of this, and specifically asked about the package of Barclay’s CEO Bob Diamond, who earnt just under £21M in 2011 (NB: in part, that included a “golden hello” payment of £7M, which paid the excess UK and US taxes that he incurred by moving his domicile from London to New York and back again in just under 18months, which was part of his previous contract agreement). Listening to the article, what comes across is pretty obvious: many employees have not had pay rises in the same three year period, and possibly even pay cuts or faced redundancy.

So why does CEO Pay keep rising? There appear to be three factors at present:

1. After the crash of 2008, three year schema’s of profit and performance improvement seem to be kicking in. In other words, economic recovery
2. The rise of the East as an industrial power house continues, and presently drives many companies bottom line profits, particulal in the luxury sector. However, many CEO’s seem determined to leverage this to continue the historic differentials between the under developed East and the developed West. The reason that they can do this is because…
3. There is still a perceived lack of talent in the upper esceleons of the Executive sector. Secondly, in these risk adverse times, much as though you may have done great things in one sector, no longer does this mean that you can do the same in a different sector. Careers seems to be siloing, and hence shortages in certain sectors are being multiplied

Can the rise therefore continue? Simply, no!

What we have seen in the last 18months is the gradual rise of share holder power. Traditionally happy pension funds, bond holders and even active hedge funds have now started publicly voicing concern at the continuing rising levels of executive pay, particularly when like oridinary employees they have not seen their own returns rise, unlike those of CEO pay. In fact, in 2011, the FTSE dropped by 6.5%.

There is also a common theme to these public out crys, often lead by shareholder advisory body PIRC, that CEO pay should be tied distinctly to shareholder returns. In other words, its fine having an independent remuneration committee who say that you should get a pay rise of X%, but if that is not tied to or at least publicly equivalent to what the shareholders are getting, then it won’t get voted through at the AGM. The list of CEO’s facing such shareholder revolts is rising, with in 2012 alone:

• Barclays: 32% of shareholders voted against the bank’s pay plans, while 24% failed to back remuneration committee head Alison Carnworth
• William Hill: 49.9% were against the pay package for chief executive Ralph Topping
• Glencore/Xstrata: 40% of shareholders did not support the annual pay report, while many opposed the re-election of two directors, including Glencore boss and Xstrata board member Ivan Glasenberg
• Premier Foods: more than 30% of shareholders voted against the company’s remuneration report, which included a large “golden hello” to chief executive Michael Clarke
• AstraZeneca: CEO David Brennan announced his resignation after shareholders expressed concerns about the companies performance
• Trinity Mirror: CEO Sly Bailey announced she was stepping down amid controversy over her pay. Almost half of shareholders later voted against the firm’s pay plans
• Aviva: CEO Andrew Moss left the company one week after shareholders voted to keep him as boss but voted against his pay package

The lastest CEO to face this trial by return to shareholders is WPP CEO Martin Sorrell. Acclaimed as a business master, and most often a PR guru, Sorrell has defended his proposed 2011/12 package of £6.8m – a 60% rise on the previous year – with a “because I started the company” defence. Lead by PIRC, shareholder disatisfaction is rising, with even the ABI giving it a “red alert” marking. I think the revolt against Sir Martin is unfair, as company profits did rise by 18% to a record £1Bn, but the problem is that they didn’t rise by 60%. There is a compromise, but Sir Martin appears to not presently want to undertake it.

What can CEO’s do in these times? The options are pretty simple:

1. Fight to retain pay rises agreed in their contracts of employment. Personally, I personally conclude that this is presently the King Canute position
2. Stay in place, and accept a lower rise in pay package, at somewhere around the return to shareholders
3. Resign, much as the CEO’s did in the cases shown above. Most have headed into the private sector, where total package encompasses sell-on benefits of operating in private equity

I have always told job seeking candidates at whatever level, to focus on package over headline pay. Secondly, even at the CEO level, you have to assess what is fair market rate. That is changing quickly presently at publicly listed level, as economic fundamentals will always dictate.

Good Luck!

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