Are UK execs underpaid? Or just greedy?

This week should top executives be paid more? UK chief executives say the other poor cousins of their American rivals. Does that hurt our economy? Or are they just being greedy? I think there will always be an issue in society about fairness and fairness in the way that money is distributed. This is the business where we take you through the big business stories of the day. I'm Domino co-Connell, a columnist at the Times and the business presenter on Times Radio. And I'm Hannah Prevert, Associate Business Editor of the Sunday Times. So Dom, nice to have you back from holidays. Two weeks of holiday, great yes. We missed you greatly and we're jumping straight back into a very exciting episode on a subject that you've written about extensively over your very many years of journalism, executive pay. So why are executives paid so much? And how does that compare to the US? Well, there's always been a big gap with the American certainly as long as I can remember anyway and probably going back a lot longer. But I think looking back, we always go through a cycle with executive pay. Companies push and pull and try and get a bit more. Then you have some kind of crisis or boardroom revolt or shareholder revolt and then it gets set on for a bit. And then the cycle turns again. And now we're at the beginning of another cycle where you can see companies agitating and chief executives are agitating to pay their bosses more. And that's against the backdrop of having already gone up a huge amount. So paypactors for bosses are FTSE 100 companies have gone up from an average of three and a half million pounds, five years ago to nearly six million pounds now. And so when you compare that to the average man or woman on the street, it seems absolutely extraordinary. And then of course you've got the greens proposing policies that would put a pay cap in place. So yes, this could be shaping up to be quite the dust up. Well, to help us take a closer look at all this, we're joined by Pippa Bigg, chief executive of board intelligence, a board in advisory firm. Pippa, good morning. Morning, thanks so much for having me on the show. And also Richard Bellfield from WTW, or Willis Towers Watson, I'm not allowed to say that, WTW, an executive compensation and advisory firm and he guides boards on how executives should be paid. Hello Richard. Thanks very much for having me. So Pippa, let's kick off with some thoughts from you. Where are we on executive pay? And how high up is it on the list of priorities for boards? Obviously you spend a lot of your time chatting to chairs and non-exex directors of large companies. And how much pressure are they under to approve these huge pay rises as Dominic just laid out? Well, I think we need to look at the broader context that boards are operating into. Currently there is a fight for talent, technology and capital. Those are the three things that boards are kind of preoccupied around. And then, so if you kind of take each one, talent, how do I get the best talent, especially for operating on a global stage? So many of our businesses, we want to have international reach, not just the national kind of companies who just do business within the UK. The minute you're operating on that international stage, you need to be internationally competitive, basically for talent and for and for technology. So I think the decision that boards need to take, and one of the things that I think we believe is really important, is you've got the regulatory context, but ultimately, ultimately the decision here sits with the board around how they want to deploy their capital, their assets, to best deliver their goals. And I think one of those things is really important that you've got the best possible top team. And obviously, remuneration comes into play there. Talking about public companies, so ones that have their shares quote on the stock exchange, companies that aren't quote on the stock exchange can do pretty much what they want with pay. It doesn't really matter so much. People from looking at it from the outside might think there's just a conversation and the chief executive asked for something and then they get it. But there's a whole machinery that happens. That's absolutely right. We just described this, what are the typical components of a big public company's pay for the chief executive? Yeah. So in terms of the structure, normally it comes in three parts. So there is a base pay, there's a salary same as anyone else would receive bonus, that's an annual bonus focused on performance during the year. It's meant to incentivise delivery of the strategy within the year. And then there's a long term component, which is usually delivered in equity. And that's really about aligning the executive. When you say delivery they get a certain amount of shares if the share price is a certain target or whatever the performance starts. And that's meant to align with the shareholders of the company over the long term. So you have these three things. So you have your basic salary. What would the bonus typically be sort of two or three times salary? It depends on the kind of company in the first year, one hundred and median would be somewhere between target, you know, kind of one and one and half times base salary. And then this longer term thing where they get shares over time, how would that be at least as much again relative to the bonus, probably a little larger than the bonus. But with a wider range of variability about that because it plays out over a longer period, there's more uncertainty. And most big companies would have an advisor like you? Absolutely. So pretty much any footsie listed company would have an advisor of our kind to help the board through these kinds of decisions. And a special committee of the board, which does nothing but look at pay. That's correct. Yes. So those lucky individuals within the board have the role specifically of managing the remuneration of the senior executives to the company. So in the UK, that's the executive directors. And just to finish with this bit about how it all works with public companies, the remuneration committee's report would typically where it used to be a couple of pages now, it might be 20 or 30 pages. Does it does. It does. It does. It does. It does. It does. It does have pages for the largest companies. That's right. And of course, all of this goes to a shareholder vote or multiple shareholder votes on the policy on the one hand, on the report on the other. So you can see that, that chain of accountability that goes from the board all the way through to the shareholders themselves. And just bring you in here, Piffa, how much time are boards currently spending on this? Dominic talks about the kind of cycles and how it goes kind of round and round. And we seem to be at the beginning of one of those cycles again at the moment. Is it kind of increased in visibility as a topic of conversation and board meetings? Yes, I think definitely. And in what we're seeing in the shifts in the early, you know, the early reporters from the FTSE, we've seen a shift in REM. So it's definitely been a big topic of, big topic of conversation. I think as well, we've got the, sorry, by REM we mean, sorry, remuneration. Yes, sorry, remuneration. And the, I suppose the other, the other backdrop and context for this is, I suppose two, two other big features in my view. So one is private capital markets. So over the past, you know, five, ten years, we've seen an explosion of private capital and how that's deployed within businesses. And typically within that private capital construct, you've got pay packages that can be even greater than anything that we're seeing in the listed context. So you've got that coming into play. The other piece is, I think we are at a hugely disruptive point of time with AI. And that is causing most chief execs and boards to think about how radically different their organizational structures will look in the next two to five years, but also how radically different the talent pool they're going to need within their businesses. And we've seen Katie Prescott's recent article, right, where she referenced anthropics hiring in London and the pay packages associated with that. I think from memory it was something like a 235 to 625,000 pound base salary for, you know, for machine learning experts in those roles. So I think we need to, we need to put into context what's happening in the listed environment with also what's happening from a private capital perspective. And also the radical changes that we're seeing in the technology landscape and those who have the skills to navigate that. Couldn't you have made that argument any time over the last 20 years where at a time of great technological change, private equity firms are paying multiples of what you get in the listed sector. That's been the case for 20 years. It just seems to me that this is another excuse for greedy chief executives to say, I want more. All these factors have existed for years. So I would agree with you on the backdrop, but I actually think the change that we're going to see with AI is going to be completely different to anything else we've seen before on organizational structures and the talent that we need to win. And we're already seeing a radical difference around the world. So we've talked a lot about the US and Europe, but if I take the GCC region, for example, the what's the GCC, the Gulf Corporation Council, the Middle East. The Middle East. Yeah. The Middle East, basically, you see huge AI adoption, huge pace of AI adoption. And I think in many ways faster than anywhere else in the world. So being able to transition an organization from, I guess, our legacy technology stack to an AI-enabled organization where AI is at the core of the way that the organization works. That is a huge challenge. And that's a talent challenge as well as a technology challenge. I do actually think that there will be an incredibly radical change over the next two years in organizational structures and talent more than anything we've ever seen before. And I think that is actually going to inflate the pay problem far more acutely than what we're seeing today over the next two years. Richard, do you see that as well as AI driving this whole process? I think so, yeah. I mean that and the fact that obviously organizations continue to grow and certainly one of the biggest correlations we've seen between executive pay and also for that matter, wider employee pay and performance over time is through the share price and through growth of company size. But I wouldn't mind just going back to that point about growth in executive pay here in the UK over the past five years. I think the numbers may be Hannah that you quoted. those were the actual paid delivered numbers. And obviously those are influenced by the performance of the organizations and the performance of the share price in particular because that's a key component of the package. If we go back five years, still in the COVID period, really, share prices were depressed. Company performance was impacted now, of course, we're through that. And obviously share prices, particularly for the FTSE have recovered quite a lot in that period. And performance of companies typically has gone up. So I think that has had an impact. If you look at the underlying target layers levels of performance or sorry pay levels, those haven't changed hugely for the median company in the FTSE 100, even over the last 10 or more years since the introduction of the current voting regime. But I think on a nuanced basis, what we have seen in the past two or three years is the most international companies, the most global companies, reaching a point where something needed to change. They were really struggling in the talent market and they needed to try something different. And well, it's fair to say that not everybody is absolutely delighted at the amount of money that FTSE 100 CEOs get paid. - Why the book is so interesting on that respect, the explosion and pay coming, all that's leading to a collision, isn't it? - Well, quite right. And there is this kind of legacy of revulsion over high pay, whether it was Sedric the Pig, who was paraded through the city in 1995. - He was a very nice man, Sedric. - Sedric, of course, was about Sedric Brown. - Yeah, exactly. - But there were lots of protests about the amount of money that he was paid when he got that 75% pay increase and various other points through history. So they have a point? - So I think there will always be an issue in society about fairness and fairness in the way that money is distributed. And I think, again, this goes back to a question that boards need to spend a lot of time on, which is we are responsible for how the, basically the money is allocated within this business. What do we feel is fair, right, and competitive? The challenge becomes, so there are many organizations where you have highly paid execs, but you actually have highly paid teams throughout the organizational structure. I think the issue becomes a lot worse when you have a very highly paid exec, and then your workers at the lower end of the pay scale are bottom quarter rather than top. That starts to feel unfair. We also are operating in a society where that sense of fairness around pay, if there aren't jobs available. Is it, you know, all of those issues get heightened when the job market is harder, especially at the entry level, as we're seeing with graduates, where people feel like they're in an inflationary environment and they're not earning more, but then you see these bosses at the top who are having these pay packages that are wildly inflated. So I think from a societal perspective, yes, I see absolutely kind of see the challenge. I think by the way, that challenge is getting worse with AI, and as I mentioned, with graduate job availability. And I think that the board need to be really clear and focused on their role about not just how they make sure they've got the best possible talent at the top, but throughout the organization and whether they think their approach to pay is consistent and fair across the entire organization. So Richard, we had an example of this, and we had a dry run for this in 2007, 2008 with the banking crisis, where that sort of public revulsion at bankers bonuses then transferred to all public company pay actually. And we had, you might remember, we had this terrific, will they, for four or five years, would the boss of the Royal Bank of Scotland be able to get paid a million pounds or more than many pounds? And he never did, basically. How did they inform what boards did at the time? And how do you square off this idea of public and typically towards high pay, and yet the need to attract the right talent? Absolutely. So it's a balancing act. And I think that means that, well, since the financial crisis, what we've seen is that remuneration committees, I think, have become much more focused on paying the wider organization. So clearly, they have to be responsive to the external market. They have to understand that really deeply. That's one of the areas that we help them. But also, they have to think deeply about the way that pay operates for the rest of the organization. And if you read a remuneration report now for a footsie company compared to one from 15 years ago, there's a huge amount of focus within that around how pay at the top of the organization fits with pay more broadly in the organization. And it's not just a matter of levels. It's a matter of design as well, that everybody is aligned in the same way that there are opportunities for everyone to share in the success of the organization. So I think that is a critical evolution that came out of the financial crisis. Has it really communicated itself politically? I was just thinking, if we had a referendum tomorrow on whether any boss should be paid more than a million pounds, what do you think the result would be? Well, that would be unknowable. But we can look at the Swiss example. So the Swiss actually held this referendum in 2013 around what would be the appropriate gap between the top and bottom in a company, in the economy. And that resolution lost by a level of 2/3 to 1/3. Clearly, I think those making the argument that there shouldn't be that kind of structure for companies to rely on, they won that argument clearly. And I think they raised arguments that obviously resonated with the wider electorate around the economic success of those companies and that the standard living of people in Switzerland depended on the continued status. I don't think this was a electorate, it's the same as you can. Do you know what? I think about this as a really interesting point, because on the face of it, of course, everyone is going to vote that no, we shouldn't have pay packages over a million pounds. It seems obscene. I think the challenge is when you start to roll for the implications of that decision and the economics of that decision and what that then means for the general public, that's when I think the situation becomes a lot worse. And actually, if you share that full story, people would vote in a different way. And if I explain that a little bit more. So we host a series of events with board members kind of throughout the year. And last year, I was absolutely shocked to learn the number of board members who weren't, who were international. They might have, where their country of residence was, all around the world, different places. The non-dom changes had meant that many of those individuals were saying, I can no longer keep my UK board positions. I need to sell my house here. I need to no longer earn money and pay tax here because of the situation. And I think the challenge with the pay piece and where I have real sympathy for board members, again, we've got this global talent race. We need to have the best teams to have prosperous businesses and prosperous businesses lead to a prosperous society. And all those people who are earning the money, they're paying a massive amount of tax that then goes back into, that then goes back into the economy. And those businesses being successful, they are contributing money that then goes back into the economy. The challenge is, if we put in place a policy that hurts that construct too much, that tax money all disappears. And then we're in a far worse place as a country because basically that growth and revenue stream disappears. So do you think it's a PR issue in that we're not telling the story properly rather than a kind of structural pay issue? I saw a really interesting piece from another UK founder who, and Adji, I'll check because it was on LinkedIn. So you and Blair put out a piece where he mentioned the UK tax contribution multiverse had made that year through their employment. We should just quickly explain you and Blair, say the son of the former Prime Minister Tony Blair and he's got this company, Multiverse, which sets young people up in apprenticeships, right? Exactly. Exactly. But it was one of the first times that I'd seen an organization come out and say, we've made this tax contribution through the employment that we've created basically in the UK market. And it's one of those things that I'd love to play out the story of, you know, Rolls Royce. We've hired a great chief exec. We've grown our share price. We've contributed ex, you know, amount into the UK economy. That has funded how many schools, how many hospitals, how much, like, that's the full piece that I think we need to be able to understand. And perhaps without that chief exec, that growth and that money wouldn't have existed. These are all great arguments that you both make. Which party is going to make that argument in its manifesto for the next election? That's a difficult question to answer, I would say. Because if you think about the non-doms, the non-dom regime was first abolished by a conservative chancellor by Jeremy Hunt. Yeah. Labour, you know, Titan, as you made it even deeper, you know, the crackdown. And I can't, and the Greens, who are now riding high in the polls, are actually going to, you know, a very extreme position on executive pay. But you can perhaps talk about that now, the idea that you'd have a differential of no more than 10 times. So if the average, if the median worker at Tesco, and 20,000 pounds and the chief executive couldn't have more than 200,000 pounds, could that work? What would happen to the UK corporate scene if that was brought in? Yeah, I think it would be extremely challenging for those companies. Clearly, you know, from a point of view of competitiveness, and then I think in terms of the fiscal implications that you mentioned, paper. So from a competitiveness point of view, we're talking about huge organisations here. And, you know, whether you look in this market or whether you look anywhere else around Europe, or more broadly in the world, you see bigger differentials, materially bigger differentials between top and bottom of those large organisations. then 10 to 1. And I think it is a reality that large organisations tend to bring bigger differentials. And clearly those large organisations are the cornerstone of the economy. So without those, it would be challenging in terms of growth and living standards, I would say. And there was a risk, of course, because capital and companies, to some extent, are mobile, that they could even seek to move elsewhere under a regime like that. And that would clearly have implications for everyone in the country. And it's important also to think about it, I guess, on a case-by-case basis, right? So Pippa, you just mentioned the Rolls-Woyce examples. The chief exec there, currently earning £4.6 million, but they want to increase his pay to £18 million. That seems quite extraordinary. We should probably say that the boss of GE has been competed at the US, probably on something like £17 million. Well, exactly. So apparently he's a two-fan zoning, 5% less than a divisional leader at GE. So that, again, when you take that in the Wyatt Decontext, it seems fair, right? Exactly. He realises the challenge. So, and we're all human as well with the electorate. If you take to the electorate, who would you, you know, you have an opportunity to do the same job and be paid twice as much? What are you going to pick? Most people will pick being paid twice as much to do the same job, right? If they have that option of choice. And therefore, I think we'll understand that kind of context of operating on a global stage that we've got a chief exec of a hugely successful organisation or, and has had a hugely successful ten-year whilst he's been there, but is paid less than a divisional head of his competitor in the US. And again, I'm not suggesting we go to the race to the top, but at the same time to think that we could pay them a tenth of what they were currently being paid and attract the talent that we need to lead that organisation, I think is conceptually, I love the idea, it's just not realistic. It's just not practical. Can you give an example of a boss of a company who hasn't been hired in the UK and has gone to the US? I can't think of any. I mean, I know that this, this, this point about competitive salaries has been made for years and years, but I can't think of any examples of someone who's upsticked and said, okay, enough, enough with the UK. I think very often, you see that where the talent leaves earlier in their career moves to the US and then they rise up through the ranks and we've seen people like Johnny Ives is a great example of someone with a British background to roast a very near the top of one of the biggest companies in the world. So, I think we see different patterns around that, but certainly the UK has traditionally been quite a strong exporter of talent, not just to the US, but to other parts of the world. And it's like a really naive question, is there something that motivates chief execs more than pay or at least on a par? And the reason I ask this, if we think about the BBC DG job and of course we've had Matt Britain go into that job, well, working in technology, he could presumably go and be paid a huge amount more than working for the National Broadcaster elsewhere, he could go into another tech job, couldn't he? So, there surely he's motivated also by potentially public service. What do you think, Piper? Are there motivating factors? Absolutely, absolutely. I don't think any chief exec goes to work just for their pay package. They care about vision and values and the strategy and what they're trying to achieve, definitely. But in a competitive market where you could go and be the DG of the BBC or the BBC's equivalent in three other locations in the world and they're calling you saying, come here, we'll offer you two terms. That's where I think yes, vision and values come to play, but in a market where there are lots of equivalent businesses with the same vision and values and different pay, that's when I think pay becomes the more important factor. Richard, could you just cover off something which I think people will find a bit mystifying? This week we've got lots of shareholder meetings of big companies where there will be votes on pay and you alluded to it earlier. It's a bit confusing, but in essence, if the shareholder's vote against the pay, it doesn't mean a great deal, really, does it because the chief exec will get the money anyway. It does. Well, there are two kinds of votes to that. So there is the vote on the remuneration report. That's the implementation of pay in the prior fiscal year. You're right, that's an advisory vote. So clearly companies want to make sure they gain support for that, but it doesn't stop them from doing something if they lose that vote. If they lose the policy vote, however, which comes up every, at least every three years, that's the envelope within which the board can operate when setting the pay of executives. And so if that is struck down, they have to go back to the drawing board and go back to shareholders with a different set of proposals. And that is a serious constraint on board action. Are we getting a few more scraps of a pay in the SAGMCs, and do you think? So far, it's been a relatively quiet AGMC, and I would say clearly there are some of these kind of bolder proposals coming through. As we've seen in the last couple of years, they tend to be from companies that are highly global in nature, bringing that global competitiveness argument to the table. So we may see some interesting votes around that as we proceed, but I don't expect the trend to be any different from what we've seen in recent years. I'd like to finish off with a throwing you both into the realm of politics again. Throw ourselves forward three years. Prime Minister Polanski, Zach Polanski is waving outside the steps of number 10. And one of the first things, rather like Theresa May actually, in her doorstep address at number 10, she talked about fixing big business. Remember, she was reacting to the BHS and particularly Valerie and all sorts of stuff. And now, it's all these things for business. Polanski might well say when he becomes Prime Minister, if he becomes Prime Minister, I'm going to tackle the inequality and executive pay, and I'm going to bring in this 10 to 1 ratio. What does business say in response to an attack on the current system of that nature? How can it make its case? I would start by saying, think carefully before acting in this area. And I think it's instructive to look at examples elsewhere. If you look at the countries that have the greatest levels of social cohesion, the lowest levels of economic inequality, it's the Nordic countries most likely as a group globally. You look at those countries, what did they have in common? They have incredibly strong overseas focused, large successful organisations. And I think they are conscious that the standard of living and the ability to drive those really strong social values and outcomes is linked to the success of the economy that underpins that. And that success of the economy is underpinned by itself by very strong large organisations. So I think it's instructive to look at examples elsewhere before acting in this area. Pippa, your message to Prime Minister Polanski? I think if we take the point that he's trying to get out, which is fairness, there are other ways of achieving fairness that doesn't result in a mass exodus of chief execs and of listed businesses that are paying into the tax coffers that this country needs. And I think it is also really important to roll forward and model different scenarios. So imagine day one, you stand on the steps of 10 Downing Street and say, it's the 10 to 1 ratio. How many, let's now work on some assumptions, how many businesses then say, we're leaving the UK? And what's the impact of that? How many schools and how many hospitals close because of it? So I think it goes back to then, how could we achieve more of that fairness that Zach is trying to get at? Which by the way, I am a real believer in that perhaps just not in such an extreme way that has devastating impacts on the economy. And we did of course ask Greens to come on and give us their views on the poll class today, but unfortunately they were unavailable. So thank you so much for joining us today, Pippa Beg from Board Intelligence and Richard Bellfield from WTW. Thank you. Thank you so much. Thanks so much. So that was a really interesting discussion. I think a really timely one too. The thing that struck me was this point around how we compare internationally, right, with our competitors around the world and make sure that we're continuing to attract the brightest and the best. Yes, I think that's probably the least of British businesses worries when it comes to executive pay. I think the big issue for British business is the rising popularity of populous politicians who want to really crack down on executive pay. And although they might say this and we have this war for talent, except all this sort of stuff, that doesn't really play out at the ballot box. And I think British business as a whole is very poor at making these arguments in favour of attracting talent, tax revenue, all this kind of stuff. And it's going to have to get us together to do that if it wants to be left alone to set the executive pay. Yeah. And the other interesting point I think Pippa May was around AI as well, and how else disrupts the field of executive pay as well. So we'll have to keep our eyes peeled on how that develops further. What are you writing about this week? So I was thinking actually about writing about something that's linked to this kind of succession planning and how you succeed a star CEO. So the person who comes along after two fans, for example, is going to have some very big shoes to fill, how about you? I'm going to write about the trial of the century, which I think may not be the trial of the century, Elon Musk versus Sam Ultman, which will bring to it to a courtroom this long, simmering feud between the two of them over Musk's involvement in the early days of open AI. Jury selection for this trial on California starts on Monday. They should be in court on Tuesday, a case with big implications for, well, the future of artificial intelligence. I guess that means the future of the world. Fast nacing, a duel between the tech braids. You can catch us wherever you get your podcasts, and don't forget you can see us in the flesh on YouTube too. And we'll see you next week. Until then, goodbye for now. Bye. (upbeat music)