US shareholders have slashed CEO pay by 38pc since 2000
IT is often said that the problem with the pay of UK CEOs is that they are becoming too much like their American counterparts. The argument is that – supposedly – US bosses have seen their pay spiral out of control, especially in recent years, and that their British counterparts are now following suit.
But this view is out of date. US shareholders have long had a much tighter grip on the pay of their top staff. Pay has actually collapsed in the boardrooms of listed US firms compared with a few years ago. The UK shareholder spring is welcome – but merely another case of the City catching up with Wall Street.
Take fresh data from left-leaning think-tank the Economic Policy Institute. Total CEO pay at the 350 top listed US firms was 231 times that of the average worker in their industry last year. By contrast, at its peak in 2000, the ratio was an astonishing 383. US CEO pay has recovered somewhat from its recession-induced trough when the pay ratio fell to 193.1 in 2009. But in relative terms, CEOs are back to levels first seen in about 1997. There has been no permanent, unchecked increases; the gap is not constantly growing, regardless of performance or the underlying strength of the economy. UK institutional shareholders need to acquaint themselves with these facts, and work out how they too can regain control.
The figures use two measures of US CEO compensation: one incorporates stock options according to how much the CEO realised in that particular year (by exercising available options), and the other incorporates the expected value of stock options granted that year. In addition to stock options, the total compensation measure includes bosses’ salary, bonus, restricted stock grants, and long-term incentive payouts. All the figures above are based on options granted. On the options exercised measure, the current pay ratio among top US CEOs is 209.4, up from 181.5 in 2009 and down from the record of 411.3 in 2000.
Am I saying that all is for the best in the best of all possible worlds, as Voltaire’s Candide might have put it? Of course not. But it is nonsense to believe that the pay of US CEOs is out of control or that it is unrelated to stock market values. It is clearly closely supervised by investors and relatively closely linked to performance. Britain’s shareholder spring is an excellent development because it will ensure that a similar degree of supervision becomes the norm in the UK.
US CEO pay exploded between the 1960s and the late 1990s. It grew by 78.7 per cent between 1965 and 1978 on the options realised measure, and then by 1,278.8 per cent between 1978 and 2000. That is when the trend reversed: pay since then is down 37.7 per cent, cutting the gains from 1978-2011 to 759.3 per cent (the figures are roughly similar on the options granted measure). The gulf between CEO and median pay was irrationally low a few decades ago, constrained by crippling taxes and regulation. Benefits were often granted in an off-balance sheet manner that wasn’t visible in reported pay packets. The liberalisation since around 1980 has made top pay much more closely linked to supply and demand. Large firms have exploded in size and gone global, employing far more people and becoming far more complex. Good management skills deliver huge value when they are applied to vast businesses. It makes sense therefore for bosses’ pay to have risen substantially. But it is also apparent that this went too far, something that US investors started to realise in the late 1990s. Hence the crackdown. Britain’s shareholders and the City need to become more, not less, American.