London: Chief executives at Britain’s largest companies had a pay cut last year. But profits fell further, ensuring a decade-long trend of bosses taking a rising share of corporate profits continued.
The average pay for chief executives of a company in the blue chip FTSE 100 index was £5.23 million ($7.6m) last year, down from 5.36m in 2014, an examination of corporate filings shows.
However, FTSE 100 profits fell more than 40 per cent, helping to lift CEOs’ earnings to the equivalent of 0.58pc of their companies’ total profits for the year, from 0.32pc in 2014.
This represents a leap over the past decade. In 2005, CEO compensation, including pensions and share awards, was just 0.1pc of pre-tax earnings, the analysis of annual reports over the period shows.
Rapid growth in executive pay has long drawn criticism from some politicians and media headlines denouncing corporate “fat cats”. Now shareholders are increasingly raising their concerns, notably over a bumper deal for BP’s boss Bob Dudley as the oil giant reported its biggest ever annual loss.
Measured against share prices, the balance of gains and losses has also tipped in CEOs’ favour.
The FTSE 100 index dropped around 5pc last year but CEO pay at the component stocks fell only 2pc. Between 2005 and the end of 2015, the index gained almost 30pc, while CEO pay doubled at the 87 current FTSE companies where comparable data is available.
Executive pay consultants say UK packages are well above continental European levels but fall short of those in the US.
Most companies deny there is a problem with pay. They say they have responded to investors’ demands to link packages to performance, limiting fixed payouts including pension contributions. Any apparent lack of correlation with profits or share price is often due to market spikes, broader economic trends or one-off events, they say.
In recent weeks, investors have expressed their anger at annual general meetings.
Over half of BP shareholders voted against Dudley’s $20m pay deal for 2015, a year when the company lost $6.5 billion. The vote was not binding but the company said it will consult investors on future pay deals.
BP said Dudley’s pay partly reflected the fact that he hit targets including safety goals, while the loss reflected low oil prices and legal settlements related to the 2010 Gulf of Mexico oil spill, which occurred before he became CEO.
Pay campaigners and governance groups have also criticised a £70m package for WPP chief Martin Sorrell before the world’s biggest advertising company holds its AGM next month.
WPP said the payout was linked to a share plan which required Sorrell to agree not to sell some of his shares in the company for five years. This exposed him to considerable financial risk, a spokesman said.
Some pay experts say the data shows a fundamental shift in value from investors to bosses.
“Shareholders really need to be concerned,” said David Pitt-Watson, executive fellow of finance at the London Business School and an adviser to insurer Aviva.
“If you’re getting statistics where you’re seeing a hugely greater proportion of the profits of a company going out to one individual ... then that’s something that needs to give you a greater worry,” added Pitt-Watson, who was previously a board member of Hermes Fund Managers.
The recent voting against pay plans is not new. During the “shareholder spring” of 2012, investors – who had historically used their advisory votes to back management overwhelmingly on the issue – voted in large numbers against remuneration schemes. This prompted some companies to amend their policies.
CEO pay is usually set by a company’s remuneration committee, which typically comprises three non-executive directors.
Critics say such “remcos” are often made up of people with links to the CEO, sitting or former CEOs of other companies, or others who are predisposed to pay bosses a lot of money.
Louise Patten, head of the remuneration committee at FTSE 100-listed shopping centre operator Intu Properties, denied she and her peers were “old chums, back-scratching” the CEO.
“There are some outliers but I think, generally speaking, the system works. Remcos think about remuneration a lot and whether we have the right strategic drivers,” she said on the sidelines of Intu’s AGM.
Patten said the aim was to ensure alignment between remuneration and shareholder returns so that bosses had a strong incentive to do their job well. The proportion of profits that went to the CEO wasn’t usually a focus for remuneration committees, with other measures such as relative performance against peers or share price being more important.
But even some company insiders question whether the split of rewards is fair.
“A lot of shareholders have got concerns about the direction of travel of executive pay. I share those concerns in some measure,” Philip Hampton, chairman of GlaxoSmithKline, told the drugmaker’s AGM this week.
“Sometimes, maybe even frequently, it is not easy to see the linkage between the shareholder experience and the executive remuneration,” said Hampton, a past chairman of the Royal Bank of Scotland and retailer J Sainsbury.