Open letter to the Spectator - In defence of 'fat cat' chief executives
To the Editor.
With reference to your article ‘In defence of fat-cat chief executives’ 4th January 2024, we have some findings which may be of interest.
We are an executive pay advisory firm and recently published our 2023 UK CEO Value Index. The Index measures the total pay of FTSE 100 CEOs over a four-year period [up to June 2023] and compares that with total gains to shareholders over the same period. We measure changes in market capitalisation, dividends paid and any share buybacks.
In essence, it’s a simple, consistent and accurate way to determine whether CEOs are “worth it”.
As a supplement, we also examined how shareholder voting patterns and CEO pay ratios compared between those at the top of our Index and those at the bottom.
The findings are striking, and counter intuitive.
First, companies which perform better in terms of the Index - those where the CEO may be paid well but delivers a huge amount in return - experienced far more votes ‘Against’ their latest remuneration policy and report. In effect, a shareholder ‘pile-on’.
What is going on? This demonstrates that ‘value for money’ is far less a factor than simple headline pay figures – those that generate newspaper sales. In contrast to the U.S., for example, where strong performance is lauded and rewards are seen as justified, an executive in the UK is penalised for any large sum paid, irrespective of value delivered to shareholders.
Second, companies which performed best in the 2023 CEO Value Index actually have higher (almost double) CEO pay ratios, compared with those which performed worst.
What is going on? The ‘CEO Pay Ratio’ is a measure of the gap between senior management pay and the median employee pay. It is a ‘go to’ metric for those highlighting excessive pay. Without making any social commentary here, it is interesting that closing the gap doesn’t necessarily mean better performance. In fact, while the gap cannot be ignored, we need to understand what CEOs are really being rewarded for? If a CEO boosts employee and customer satisfaction while decarbonising the supply chain, and grows company profits, surely that is a factor in justifying a ‘gap’.
The conversation shouldn’t just stop at CEO pay ratios – it probably shouldn’t even start there.