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Tuesday April 16, 2024

UK boards and investors push for higher CEO pay to bridge gap with US

UK bank HSBC, pharmaceutical company AstraZeneca, consumer group Unilever and publisher Pearson are among those that have raised their leaders’ pay

By News Desk
March 03, 2024
CEO of the London Stock Exchange Group David Schwimmer AFP/File
CEO of the London Stock Exchange Group David Schwimmer AFP/File

LONDON: More UK boards are raising chief executive pay to rival US peers, marking a shift in sentiment among top bosses, chairs and investors previously reluctant to engage in transatlantic remuneration wars.

The London Stock Exchange Group is among the latest seeking to gain shareholder approval for a pay package for its chief executive David Schwimmer that is benchmarked against US rivals, rather than UK companies.

“When you look at standards for compensation around the world, the US is in a different place,” said Schwimmer this week. “And that is an issue companies competing on a global basis from a base in London need to take into account.”

Frustrations among UK board directors about the constraints on offering internationally competitive pay packages to their top executives have been simmering for years. Falling behind on executive pay can hamper a company’s ability to attract and retain the most talented senior management teams, which some say risks exacerbating the decline in the UK’s capital markets.

Now there are signs executive pay in Europe is at a tipping point, with greater efforts by boards and concessions from shareholders to bridge the divide with the US.

“There’s been a sea change of thinking,” said Peter Harrison, chief executive of FTSE 100 asset manager Schroders. “More and more investors and boards are recognising that if we don’t get executive pay right there will be an impact on the UK’s competitiveness. It’s not just about the listed markets, it’s about creating an environment where founders want to grow their businesses here, and there’s a culture where risk-taking and success is celebrated.”

Already some British companies have lost their chief executive over pay. A notable example from 2019 was Namal Nawana’s decision to quit Smith & Nephew after 18 months because the UK medical devices company could not meet his pay demands. The company has continued to wrangle with shareholders on pay since.

The higher multiples available elsewhere are striking. When Laxman Narasimhan gave up his $7.5mn role as head of UK-listed household products group Reckitt Benckiser, he went on to run US coffee chain Starbucks for up to $28mn a year. LSEG wants to boost Schwimmer’s current £6.25mn package to £11mn.

Other executives are turning to private companies. One senior UK investment banker said there was “a bit of a brain drain” away from listed corporations towards private equity-backed businesses. “I think quite a few sitting CEOs will end their career in private equity rather than taking another CEO role . . . it’s way more remunerative.”

Corporate executives, board directors and industry lobbyists said the companies raising executive pay as an issue with shareholders were those with big US divisions, American rivals or whose top staff were originally from or already working in North America. “I don’t think that your provincial UK plc or German-listed company is suddenly going to say, ‘Oh, we now need to compete against the US in terms of [pay]”, said David Tuch, managing director at Alvarez & Marsal, who advises companies on executive pay.

UK bank HSBC, pharmaceutical company AstraZeneca, consumer group Unilever and publisher Pearson are among those that have raised their leaders’ pay or are lobbying investors for support to do so.

The executive pay debate is also picking up pace in continental Europe, where carmaker Stellantis last week announced a 56 per cent increase in its chief executive’s pay.

Ahead of the upcoming AGM season, some corporate boards are proposing bigger pay increases than in previous years, while shareholder groups are taking a more nuanced stance. “If you provide a solid rationale, investors are likely to listen,” said one board director.

“There is now a much more understanding stance from the big asset managers,” added a senior City stockbroker.

The shift in sentiment was given momentum last year when Julia Hoggett, who heads the London Stock Exchange, part of the wider group, called for investors to back higher executive pay to discourage companies from moving their stock market listings overseas, particularly to the US, and retain staff.

One FTSE chair said companies that make a “fraction of their revenue in the UK cannot organise their remuneration . . . [according to] local mores.” He added: “There’s a bit of waking up and smelling the coffee going on. If the LSE wants to be a place where companies are international and not just UK based . . . most people are going to want to employ CEOs who are US citizens — and you need to pay people according to where they live and work and pay tax.”

Around 82 per cent of the FTSE 100’s revenues are from overseas markets. Average pay for FTSE 100 chief executives rose in 2021 and 2022, the last years for which full data is available. But their £4.44mn average remuneration in 2022 was lower in nominal terms than the £5mn handed to bosses 11 years earlier, according to research by the High Pay Centre think-tank.

Chiefs of companies on the US S&P 500 index were paid three times more in 2022, earning on average $16.7mn (£13.6mn at the time), according to labour union federation AFL-CIO.

“In the next two years we will see a small but significant number of [UK-listed] companies that will move the boundaries in terms of incentive levels but also the structure of how we pay,” said Mitul Shah, a Deloitte consultant specialising in executive remuneration and global incentive plans. The goal, he said, was not to match US levels of pay, but it was about “closing the gap” and the issue extended beyond the top job. “Boards and chairs are concerned about their ability to retain their CEO and other senior executives.”

Advisers said companies had been exploring incentives aimed not just at maximising total pay for executives that hit their performance targets but using so-called hybrid schemes that factor loyalty into share awards.

Xavier Baeten, professor in reward and sustainability at Belgium’s Vlerick Business School, highlighted the unintended consequences of trying to compete in US markets, citing the example of Dutch-Belgian retail and wholesaler Ahold Delhaize, where the group chief executive earned €6.5mn in 2022, while the US CEO — a divisional head — earned €6.6mn.

“You can imagine that managing this and finding a good balance is a huge challenge for boards,” he said.

Pay experts warned these types of situations created problems down the line — for example if a US divisional head is a future CEO candidate. There would be very little room to bump pay even further as an individual might expect should they take on the top job.

“All increasing executive pay is likely to do is increase the pay packages of some of the richest people, while doing nothing to tackle the fundamental issues underlying the UK’s economic woes,” Andrew Speke, spokesperson of the High Pay Centre, said.