The story of a chief executive about to join a high-profile British company has gone down in town history. Before taking the reins, a trusted advisor asks him the uncomfortable question of how much he thinks he should be paid.
‘How much do you think I can get away with?’ was the haughty response.
It’s an intriguing insight into the selfish, entitlement mentality that still prevails in some of Britain’s boardrooms, despite decades of efforts by campaigners to curb “big man” pay and the falling cost of living that has affected homes. The number of leading companies pushing for pay rises for their leaders has increased even after they spent an average of £4.5 million, a recent study has revealed.
Analysis by business consultancy Deloitte found that 16 FTSE 100 companies are looking to revamp their pay policies, with nine of them having “radical” plans to increase their bosses’ pay this year, up from four previously.
“Many of these companies have a significant presence in the United States and cite the disparity in pay levels between the United Kingdom and the United States as a challenge in competing and retaining senior talent in a global market,” said Mitul Shah, Deloitte partner.
But are British-based bosses really underpaid? And is there any evidence that more lucrative deals on offer across the Atlantic are causing an executive exodus of top talent?
To find out, The Mail on Sunday compared the remuneration of chief executives at leading companies on both sides of the pond. We found that American bosses generally earn more than their British counterparts, but the gap is not always that big, especially when stock market valuations are considered.
BAE Systems’ Charles Woodburn took home £13.5m last year, almost £5m less than the Lockheed Martin boss. But the US defense contractor is worth more than twice as much as BAE based on their respective share prices.
The same is true in the oil and gas sector, where Shell’s Wael Sawan recently joined the growing chorus of bosses threatening to up their sleeves and leave London. He and BP’s Murray Auchincloss would seem to be paid a pittance compared to their peers at Exxon and Chevron, until one realizes that investors value the shares of the American energy giants much more highly.
Pascal Soriot, CEO of pharmaceutical giant AstraZeneca, once complained about being “the lowest paid CEO in the entire industry.”
He has been playing catch-up ever since and is now Britain’s highest-paid boss, earning £16.9 million last year. Soriot still lags behind Eli Lilly’s US counterpart, but a recent Financial Times analysis puts it in the middle of the Big Pharma salary pack. That may explain why more than a third of AZ shareholders this month opposed plans to give him a bumper pay rise.
Experts say pay disparities exist because American bosses are rewarded much more in stock than in salaries, but that comes with risks.
“The danger with packages that focus too much on share price performance is that they can lead to short-term thinking,” says Russ Mold of investment firm AJ Bell.
The average tenure of a FTSE 100 boss is just over five years, he notes. “It’s not difficult to cut costs or make an acquisition to increase short-term revenue and perhaps share price,” she adds. Another reason American bosses are paid more could be that they are better managers.
Among the leading calls for paying employers more is Rupert Soames, chairman of the Confederation of British Industry lobby group.
It has named many FTSE 100 companies ‘Brilos’ (‘British only in listing’) because the majority of their income comes from abroad. As chairman of Smith & Nephew, Soames is busy urging shareholders to give chief executive Deepak Nath a huge pay rise at the medical equipment group’s annual meeting this week.
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It is true that Nath earns much less than his partner at Stryker. But that may be because investors value the American rival more highly, giving it a stock market price ten times that of Smith & Nephew.
Also up in arms is Julia Hoggett. The chief executive of the London Stock Exchange has warned that a “lack of a level playing field” is causing a brain drain from the City to New York and beyond. Another clash came earlier this week when investors backed plans to more than double boss David Schwimmer’s salary to £13.2m.
That has put him on par with Jeffrey Sprecher, who runs Intercontinental Exchange, owner of the New York Stock Exchange.
Companies such as chipmaker Arm Holdings, plumbing giant Ferguson and Tarmac owner CRH have already moved their primary listings to Wall Street.
Executive pay is higher in the United States, but so is pay inequality. While the typical FTSE 100 boss earns 109 times more than the average employee salary, the ratio in the US for the top 500 companies is 272 times.
But it is often forgotten that US bosses also wield far more power in the boardroom than their UK counterparts. They generally combine the role of CEO and president, something that is frowned upon here. There is also little evidence of an active transfer market among disgruntled UK executives heading west for big money.
Perhaps the most successful British-born executive in the United States is Jane Fraser, but she rose through the ranks before taking over at investment bank Citigroup.
It is also significant that the list of the highest paid bosses in British companies is dominated by foreigners. That suggests London remains a magnet for attracting and retaining free global executives, whatever their salary.
To that extent at least, reports of the city’s demise as a leading financial center appear premature.
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