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Systemic Flaws Cause for UK’s Out-of-Whack CEO Pay Ratio

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In just three working days, the United Kingdom’s top bosses make more than a typical full-time worker will earn in the entire year. This is according to calculations from independent think tank the High Pay Centre and the Chartered Institute of Personnel and Development (CIPD).

The average (median) full-time worker in the UK earns a gross annual salary of £29,574 ($37,709). In 2019 the average Financial Times Stock Exchange (FTSE) 100 CEO, on an average (median) pay packet of £3.9 million ($4.9M), only needed to work until 1 p.m. Friday, Jan. 4, to be paid the same amount.

The £3.9 million figure was calculated by the CIPD and the High Pay Centre in their 2018 analysis of top pay and it marks an 11% increase on the £3.5 million figure reported in their 2017 analysis. The pay increase means that 100 CEOs will only need to work for 29 hours in 2019 to earn the average worker’s annual salary, two hours fewer than in 2018.

“There is still far too great a gap between top earners and the rest of the workforce. Average pay has stagnated whilst top CEO reward has grown, despite overall slow economic growth and very variable business performance,” said Peter Cheese, chief executive of the CIPD. “Excessive pay packages awarded by remuneration committees represent a significant failure in corporate governance and perpetuate the idea of a ‘superstar’ business leader when business is a collective endeavor and reward should be shared more fairly. This imbalance does nothing to help heal the many social and economic divides facing the country.”

The CIPD and High Pay Centre launched “RemCo Reform: Governing Successful Organizations That Benefit Everyone,” which identifies the shortcomings of the remuneration committees (RemCos) charged with setting executive pay and calls for them to be significantly reformed. In particular, it highlights: 

  • The myth of super talent as a factor that continues to drive excessive pay with one remuneration committee chair commenting: “It’s nuts… and nuts has become the benchmark.”
  • The need for much greater diversity among those responsible for setting CEO pay in order to combat group think. This diversity is not just in terms of ethnicity and gender but other factors, such as professional background and expertise.
  • The current pay mechanisms contribute to the problem of high CEO pay. In response, the CIPD and High Pay Centre recommend replacing long-term incentive plans (LTIPs) as the default model for executive remuneration with a less complex system based on a basic salary and a much smaller restricted share award. This would simplify the process of setting executive pay and ensure that pay is more closely aligned to executive performance. 

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