ME Data Services (IDS) released a report on executive pay last week, drawing hysterical condemnation of business leaders from unions, politicians and journalists. However, research by Harvey Nash’s Board Practice and the London Business School’s MBA Consulting Team reveals that FTSE 100 chief executive pay is just not as simple as many would like us to believe.
First, since the downturn started in 2007 not a single chief executive listed in the report’s top ten earners had a significant rise in base salary. In fact, the average rise was in total 1.6 per cent over four years, well below the growth in UK average earnings during that time.
So, much of the growth has come from performance-related pay. But for the report’s authors to pick one year where the economy started to recover and performance improved, places the report out of context. Over the last four years, the picture is very different: since 2007 chief executives’ performance-related pay has actually declined by 2 per cent.
Second, the IDS report, in some instances, is actually misleading. Four of the top ten earners’ compensation is stated in their annual accounts in US dollars. To simply convert this to sterling during a period where sterling has devalued 25 per cent further artificially overstates the so-called rise in pay.
Third, the report stated that chief executives’ rewards were not in line with share price movement, suggesting rewards for failure.
Looking at the IDS data just for 2010 this seems correct, but the Harvey Nash/London Business School research found that between January 2006 and December 2010 changes in share price explained about 30 per cent of the variation in direct pay of continuously-serving chief executives. Longer-term, chief executives are being judged on share performance.
Let’s take Sir Martin Sorrell, chief executive of WPP, which employs 153,000 creative professionals and is the sort of digital company which Britain needs to champion if it is to rebalance its economy. With a £250,000 loan, Sorrell grew WPP from £1m to a global winner worth £8bn over 26 years. His contract provides for dismissal at will and over 50 per cent of his package is performance-related. WPP competes in a global market where 12 per cent of revenues are generated in the UK and almost a third are from emerging markets. Compare that to a US-based competitor of WPP: Time Warner paid its chief executive Jeff Bewkes $26m in 2010, acknowledging that the company had a history of wasteful acquisitions.
London has become one of the most successful capital markets for global companies, employing executives from all over the world. In seeking to attract the very best talent available, boards must offer compensation packages in global currency and increasingly compete with Asia in hiring wealth-creators.
When UK plc is being encouraged to seek new growth in stronger emerging markets, it is disappointing that both the Prime Minister and the leader of the opposition did not take this opportunity to make the case for attracting global wealth-creating organisations to the UK for the whole country’s benefit.
Albert Ellis is the chief executive of Harvey Nash Group.