How to ensure CEOs’ pay is fairly valued

After years of rising without any real reason, CEOs’ pay is finally falling. Matthew Lynn breaks down how this trend can be continued.

Everyone agrees CEOs should be well paid. It is a stressful job and when they get the big decisions right, they can add hundreds of millions to the value of the business.

But paying the boss 40 times more than the average person would seem a fair reflection of the extra burdens of the job, and that would be half the current differential.

Figures out last week showed FTSE CEOs’ pay down by 17% for the year. According to the High Pay Centre, the average chief executive of one of the UK’s top 100 companies took home £2.7m last year, down from £3.3m in 2019.

Apart from a few Bentley dealers, it is unlikely that many people will be terribly upset about that. Over the last decade, executive pay has just kept on going relentlessly upwards, even though there was very little evidence that overall corporate performance was improving, at least at anything like the same rate, nor were many shareholders seeing spectacular returns.

By last year, the differential between average and CEOs’ pay had soared to a record 86. With average wages rising, and CEOs’ pay falling, that will finally start to narrow, at least by a smidgen. The interesting question is, how do we keep that trend going?

CEOs worth their salt

True, there are a handful of CEOs who are really worth every penny they get paid. Simon Wolfson at Next definitely falls into that category. Dave Lewis should certainly have been paid millions for his turnaround of Tesco – the company was in a dire state when he joined. Pascal Soriot at AstraZeneca is also worth every penny, although since he is already paid more than £15m, he doesn’t really need a raise.

More people could be added to the list, but not that many. In truth, most of the people running the UK’s largest companies are just corporate hacks. At best, they keep a steady ship ticking over, while at worst they spend tens of millions on pointless redesigns, meaningless slogans and vapid strategy reviews.

Corporate pay has become a racket in which a small group of executives and non-executives sitting on each other’s boards continually ratchet up the going rate for everyone. It is great for the handful of insiders who benefit from the system, but it does little for anyone else. Here are three ways we could start to change that trend.

First, hand more power to small shareholders. Institutional shareholders have proved to be hopeless at controlling executive pay. They don’t have the time and resources to devote to it and they are so lavishly paid themselves that they have lost any sense of what a fair salary looks like. It might take a tweak to the law, but we could introduce extra voting rights for individual shareholders on the single issue of approving the chief executive’s pay. It is one thing to explain a £3m salary to a group of fund managers who also count their earnings in six or seven figures. It is a lot harder to justify it to a group of shareholders who may never earn that much in their lifetime.

We need more competition

Next, we should open up remuneration committees. Right now the group of people who decide the CEO’s pay are appointed by the chairperson, usually with the help of one of a small group of headhunters. It is a system that is rife with cronyism and backscratching.

People are chosen because they don’t rock the boat, don’t ask difficult questions and nod through big pay packets without any objections. Why not create a pool of qualified board members, then allocate them to a company by a lottery? It would be random, much like a jury.

Connections and favours would count for nothing and the judgements the committee made would be a lot more objective.

Finally, we should widen the selection pool, so more people from different backgrounds can compete for the top jobs. We are starting to see more women run big companies, for example, but there is still a long way to go before there are as many as there are men. If there was more competition for every CEO role, then we wouldn’t have to pay them so much.

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