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Should UK company bosses be paid more like their US counterparts? Concerned about their ability to attract and retain talent and Britain’s corporate competitiveness, many boards and investors are now increasingly willing to benchmark executive pay against their higher-earning transatlantic peers. After years of sidestepping this prickly issue, this is a marked shift in approach.
It is motivated in part by the growing foreign footprint of FTSE 100 constituents. More than half are deemed highly international and generate revenues from four or five geographical segments, according to analysis by consultancy Deloitte; a quarter have a “significant” US presence. Many already have senior executives from or based in the US. Some UK companies have lost chief executives to US or other rivals, or have lost out in recruitment races. Similar concerns are heard in continental Europe.
Discussions are particularly acute in innovation-led sectors that have outperformed the wider index, such as technology and pharmaceuticals. Big-company executive pay signals how success will be rewarded, influencing founders’ decisions on where to develop growing businesses. Though Brexit, political dysfunction, the lack of a coherent plan for growth and a complex tax system are bigger hindrances to UK competitiveness, some have linked executive pay with Britain’s attractiveness as a place to list. Julia Hoggett, the London Stock Exchange chief executive, warned last year of a stream of companies moving to New York.
Yet high senior pay is far from the only reason for the much-envied dynamism of corporate America — and there are serious dilemmas here for the UK. Soaring US rewards, and an excessive focus on stock-based remuneration, have fuelled yawning income inequalities and the rise of a super-rich class, harming American democracy. Britain retains a cultural squeamishness over US-style red-blooded capitalism. Even so, concerns about shifting too far towards a US model must be balanced with the reality that UK business is part of a global capitalism dominated by America.
British companies already face pressure over the gap between CEO pay and ordinary workers. FTSE 100 bosses’ pay rose 16 per cent on average in 2022, driving their earnings to 118 times those of the median UK worker, according to the High Pay Centre. Bosses earned a median £3.91mn, up £530,000 from 2021. UK pay is still competitive with many major markets. But it lags far behind the US, where S&P 500 company chiefs earned on average $16.7mn (then £13.6mn) in 2022.
No one would wish to see mediocre company bosses become billionaires as a result of blunt, across-the-board benchmarking, or fortuitous share price rises they had little to do with. But there is an argument for UK company bosses’ pay to be determined on a more case-by-case basis, rather than a one-size-fits-all approach. Where there is a convincing rationale, investors should grant boards some flexibility.
The less desirable elements of the US system should not be copied. Pay metrics that focus on the short term and over-reward chief executives need to be avoided. Companies in cyclical industries such as commodities ought not to be treated in the same way as, say, biotech companies. When corporate strategies go awry, remuneration committees should limit excessive payouts.
While rewarding leadership excellence, companies need to remain sensitive to the cost of living challenges facing much of society. The fruits of corporate success should be shared by employees, not just bosses and shareholders. But in a global economy, it is unrealistic for UK companies to remain entirely cut off from what is happening across the Atlantic.