Blog
Unit 3 Micro: UK Executive Pay - All in it Together?
29th October 2011
At a time when millions of people are taking nominal or real pay cuts, the news that chief executives of FTSE-100 companies have seen their earnings rise by 43% in the last year is particularly difficult to stomach.
The figures from Incomes Data Services look at the total earnings of chief executives. Earnings include fixed pay, salary and benefits, the value of bonuses earned during the year, both cash and deferred and the nominal gains made on the exercise of any share options cashed-in during the year.
Chief Executive Officers received an average of £3.86m, while finance directors (CFOs) received 34 per cent, taking their average remuneration to £2m.
The data is the average levels of earnings, the annual increase if one looks at median values is lower - but still high at 16% and four times the rise in the value of the FTSE-100 index during the last year and seven times the increase in average earnings for all those in work during the past twelve months. The gap between boardroom and shop floor pay gets wider and wider and prompts important discussions about the impact of the chasm in pay on incentives, fairness and (ultimately) macroeconomic performance.
The default response of lobby groups representing big business is that, in a globalising world, attracting and retaining the best business talent is essential and that performance-related earnings are a key ingredient in ensuring that executives make decisions consistent with growing shareholder value. But there are many different ways of linking pay to corporate performance.
In a significant speech made last week, Andy Haldane from the Bank of England made the case for changing the way in which executive pay is linked to the profitability of the businesses they run. He argued that banks in particular should link the pay of senior executives to return on assets (ROA) instead of return on equity (ROE).
“In 1989, the chief executive officers (CEO) of the seven largest banks in the United States earned on average $2.8 million. That was 100 times the median US household income. By 2007, at the height of the boom, CEO compensation among the largest US banks had risen almost tenfold to $26 million. That was over 500 times the median US household income.” (Andy Haldane, speech October 2011)
Trade Unions are lobbying for reforms to corporate governance to give shareholders greater power to curb the pay of top bosses. David Cameron believes that having more women on the boards of our top companies will act as a barrier to excessive pay rises.
Is direct regulation putting a cap on executive pay the answer in the long run?
Suggestions for further reading:
Bloomberg: Cameron Says Executive Pay in U.K. Is ‘Issue of Concern’ After 49% Advance
BBC Radio 4 Today: ‘Spectacular’ share payouts for executives
Geoff Riley
Geoff Riley FRSA has been teaching Economics for over thirty years. He has over twenty years experience as Head of Economics at leading schools. He writes extensively and is a contributor and presenter on CPD conferences in the UK and overseas.