Are U.S. CEOs paid too much?
The U.S. pays more for executive talent, so what? That’s quite a pill to swallow for the British because a great deal of effort has gone into controlling executive pay opportunity while ensuring it is strongly linked to performance.
Headline figures for CEO pay amongst the largest and most successful U.S. corporations can be staggering:
- Average total compensation amongst U.S. CEOs is 4x the level for their UK equivalent [ISS themselves say that median total remuneration for CEOs in the S&P 500 rose 23% from 2018 to 2022, but over the same period FTSE100 equivalent pay went up a paltry 1.1%. Average pay of S&P 500 boss was $18.3m in 2021, nearly 4x more than that of FTSE 100 CEO at £4.26m].
- Ten years ago the difference was around 2x
- This, despite the fact that short-term incentive pay for UK CEOs between 2004 and 2016 broadly doubled - for the same performance[1]
Yet despite all this it is not difficult to argue that U.S CEOs are ‘worth it’.
The facts:
- S&P 500 company median market capitalisation rose 52%, their revenue rose 40% while FTSE 100 company market cap levels remained flat, despite a 20% rise in revenue.
- Although Exxon, for example, pays their CEO the extraordinary single year sum of £28m ($35m) he is the CEO who delivers the most value to shareholders: our CEO Value Index analysis indicates that £4,728 goes to the shareholders for every pound paid to him. Compare that with the Index for the CEO of Diageo (£1,033) or Shell (£509) over the same four-year period ending 2022, for example.
Does this matter?
- Well, if management talent isn’t coming to the UK, it is going somewhere else...that cannot be good for the UK’s economy
- As an illustration of the general sentiment amongst emigrating executives: J Gavin Patterson (ex BT) said, after his move to the San Francisco based tech company Salesforce: “On a personal level, you get to earn more money in the US and there is no public outcry if you are successful…often the same proxy agencies and asset managers that oppose compensation levels in the UK support much higher compensation packages in different jurisdictions, notably the US”
- The CEO of Liontrust said the US has a culture where “if you do a good job and deliver for shareholders you are rewarded, whereas in the UK there is criticism towards it”
That is part of the reason that Julia Hoggett (LSE) says “we need a constructive discussion (about executive pay) to boost the attractiveness of London’s capital markets. It is also the reason Smith & Nephew lost their CEO in 2019m, after 18months.
It is not just the money. By the time a UK executive’s first long-term incentive (LTIP) payout grant has been actually released, after a three-year vesting and two year hold period, at least two further LTIP grants will have been released for U.S. executives.
There is also the risk of a long-term plan not actually paying out. U.S. companies typically offer around two or three long-term plans. In the UK, it is far more common to have just a single LTI plan. That increases the risk of something (which may not in an executive’s control) going bump in the night….and the LTI being worthless. The shareholders are in the same boat, of course, but executives may not appreciate the value of ‘alignment’ in this regard.
The way pay is made up is relatively similar in both U.S. and UK companies – the greatest portion is long term variable pay, the remainder going to annual bonus and salary. But, the magnitude of the LTIP is so much larger in the U.S. - LTI makes up 70% in U.S. companies [2] compared with 50% in UK companies.
Many factors contribute to the growing pay disparity between the UK and U.S.
- U.S. companies outperform their UK counterparts both in terms of value creation and revenue growth;
- The structure, size and environment in the U.S. and UK are different. Whilst the U.S. does pay more, the challenges and performance there often justifies it; and
- There are cultural differences in investor views – large pay rises in the U.S. seem more welcome than in the UK. In the UK it is ‘comply or explain’ whereas the U.S. is now taking a ‘pay-for-performance’ approach, irrespective of the headline pay numbers.
Hiring top talent will be made difficult because the UK has lower pay opportunity and more rules and regulations. The greatest stress will be felt by UK listed companies with strong U.S. divisions.
However, it is generally recognised that there is a ‘lifestyle’ premium for living in the UK (longer vacation time, for example) and companies will think long and hard before moving their listing to the U.S. with its higher litigation risks and the fact that it is harder to get noticed by investors in a stock market with much bigger companies.
This means we have some time to consider what to do about pay opportunity, and more regulation probably isn’t the answer.
[1] Between 2004 and 2016, FTSE100 CEO target bonus opportunity rose from 50% to 95%, maximum from 100% to 180% i.e. for the same performance
[2] Pay mix in the UK is typically 7.5% benefits, 17.5% salary, 25% bonus and 50% LTIP. In the US pay mix is typically 6% benefits, 8% salary, 16% bonus and 70% LTIP