Covid causes fall in CEO pay—but excessive earnings remain an issue

By Andrew Speke

CEO wearing face mask

This year marks the 10-year anniversary of the High Pay Centre. We were founded with the purpose of focusing on the state of pay at the top of the income scale and the causes and consequences of economic inequality. A key part of our work since has been providing an annual analysis of CEO pay in the FTSE 100.

Our most recent analysis was published a few weeks ago, and unlike in many years the focus was less on the grotesque level of CEO pay and more on how the Covid pandemic had caused a significant drop in overall CEO pay levels at the relevant companies.

This development will be welcomed by anyone concerned about economic inequality in the UK. From a corporate governance perspective, most observers would also agree that CEO pay should reflect the experience of their company’s wider stakeholders. With the pandemic resulting in large numbers of workers being furloughed on reduced pay, weaker returns to shareholders and major public expenditure required in support of companies, it is appropriate that executive pay levels have also decreased.

However, it is questionable whether a 17% reduction in median pay to “only” £2.69m represents a sufficient economy given the immense hardship experienced by many across the UK, the accumulated personal wealth of CEOs who will typically have experienced long careers in high-earning roles, and the fact that all companies, having benefited either directly or indirectly from policy measures to support businesses, would have been in a much worse position without government intervention.

Reduced bonus payments

In terms of the figures themselves, in 2020 the median FTSE 100 CEO took home £2.69m. This is the lowest level of median pay since 2009, and is a reduction of 17% from the median FTSE 100 CEO pay in FYE 2019, which stood at £3.25m. The median CEO pay of £2.69m is 86 times the median earnings of a UK full-time worker in 2020 (£31,461). The highest paid CEO received a total of £15.5m, at AstraZeneca. This is 489 times the pay of the median UK full-time worker.

The main cause in the decline in overall CEO pay was due to the reduced payment of bonuses

The main cause in the decline in overall CEO pay was due to the reduced payment of bonuses. For some companies this is due to voluntary pay cuts in solidarity with furloughed workers, whereas for others it is due not to meeting performance targets—a more common occurrence than usual due to the economic impact of Covid. Only 64% of FTSE 100 companies paid their CEO a bonus in 2020, down from 89% in 2019. The mean bonus payment fell from £1,096k in 2019 to £828k in 2020. A total of 77% of companies paid their CEO an LTIP, compared with 82% in 2019. The mean LTIP payment fell from £2,406k in 2019 to £1,379k in 2020.

What these figures show is a substantial decrease in CEO pay across a wide range of FTSE 100 companies. Regardless, levels of CEO pay still remained very high compared to the pay of the population at large. This was the case even at those companies receiving state support during the crisis. For the financial years that overlap most substantially with the time period of the pandemic, the mean pay for the CEOs of these companies was £2.36m. Half of the companies that used the Job Retention Scheme have reportedly returned the money, but for the 11 that have not, mean CEO pay was £2.39m.

An obvious way to make savings

For most businesses, staff costs will be one of their largest items of expenditure, if not the largest, and pay for top earners form a disproportionate element of these costs. Therefore, pay for people who can afford to take a huge pay cut and still enjoy a standard of living far higher than the majority of the population will ever experience would appear an obvious place for companies to make savings during difficult periods.

It might be asked if the experience of the pandemic implies there is scope for further equalisation of pay

The fact that CEO pay levels have decreased and FTSE 100 companies—thanks to government intervention—have endured, without CEOs departing for better-paid occupations or their businesses falling apart, also raises the question of whether pay needs to go back up in the hoped-for event of a post-Covid recovery. Indeed, it might be asked if the experience of the pandemic implies there is scope for further equalisation of pay, bringing CEO earnings to a multiple of around 10 times that of the typical UK worker, for example, as was commonly the case from the post-war years up until the early 1980s.

Therefore, despite the reductions in CEO pay this year, addressing the issue of excessive top earnings should remain a critical part of efforts to “level up”, “build back better” and other clichés sloganising the objective—shared by all parts of the political spectrum—to tackle inequality and raise incomes for low and middle earners.

Andrew Speke is head of communications and Rachel Kay is a researcher at the High Pay Centre.

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What boards need to know about sanctions risk and legislation

By Ross Savage

Ryanair plane in Vilnius, Lithuania

Shifts in the geopolitical landscape and evolving regulations across the globe mean that organisations operating across multiple jurisdictions need to constantly review and assess the impact of new sanctions legislation and regulation.

The UK government committed to introducing a global corruption sanctions framework in March 2021, with the aim of “preventing those involved in corruption from freely entering the UK or channelling money through our financial system”. As well as new legislation, the global situation relating to sanctions control is perpetually changing.

Sanctions are moving higher up the mainstream news agenda. Events which have unfolded very recently almost makes reality seems stranger than fiction. Just a few weeks ago, it would be implausible that a plane could be grounded illegally by another nation to remove dissidents and yet, the EU has imposed new economic sanctions on Belarus over the interception of Ryanair flight FR4978 and the arrest of opposition blogger Roman Protasevich, with other countries with their own autonomous frameworks following suit.

This example illustrates the challenges of addressing ever evolving and complex situations. C-suite executives now need to be fully aware of such legislation and also become keen students of geopolitics and worldwide events as they transpire, to assess how new incidents (and measures) will impact on their business, their supply chains and the required sanctions controls in affected regions.

Understanding the supply chain

Part of the challenge is that different jurisdictions have different regulations. For example, now the UK has exited from the EU, it will develop its own autonomous framework. By the time this article is published, the UK government will also likely be targeting those behind the recent Belarusian aggression with new sanction controls.

To remain compliant, business leaders need to understand the nature of the entirety of their supply chain, at a granular level. Clients, customers and suppliers domiciled in any jurisdiction subject to sanctions need to be identified. Suppliers for example, may have an EU base but acquire elements of a product derived from a province subject to restrictions due to forced labour or human rights abuses.

Those responsible need to take a pragmatic view on the future, developing a strong awareness of the changing landscape in order to identify potential threats

It may even be that a particular jurisdiction is not actually under sanctions control, but that is likely to become the direction of travel very soon. Here, those responsible need to take a pragmatic view on the future, developing a strong awareness of the changing landscape in order to identify potential threats in advance, taking a risk-based approach on continuing business in that area and employing suitable mitigation measures to address the risks. It is important not to wait until sanctions are put in place and end up on the wrong side of the regulations.

Horizon scanning in this way to calculate points of exposure, means it is possible to use “trigger events” to respond proactively and appropriately to protect the business ahead of time. This not only reduces the potential impact on processes and profitability, but helps to maintain continuous compliance.

The danger for businesses when it comes to sanctions and their controls is that there are many “grey” areas. The changing environment can even be influenced by secondary sanctions. A European firm with no US exposure, operating under the protection of the EU can still run into problems if their supply chain involves Iran, for example. US regulations are aggressive and the result is a real-world impact on firms well outside its jurisdiction.

Sanctions legislation: who is responsible?

As we watch the Financial Conduct Authority’s criminal case against NatWest unfold, we are seeing the first criminal prosecution under anti-money-laundering (AML) regulations in the UK. It is clear regulators are increasingly taking a more stringent approach, where corporate fines are no longer deemed sufficient.

Senior directors are accountable for the behaviour of their staff and can be prosecuted to deter malpractice. It is, therefore, essential that the board and senior team are aware of how best to mitigate risk in relation to their respective organisations.

As well as discussing profitability at board meetings, anti-money-laundering and sanctions risk needs to be part of the debate

Staying ahead of the curve through horizon scanning and keeping up to date on live events as they occur is critical. As well as discussing profitability at board meetings, AML and sanctions risk needs to be part of the debate. Discussion allows suitable strategies to be developed to assist in protecting the supply chain, while meeting minutes ensure there is an audit trail for regulators.

Many firms use screening software which can be helpful. However, do be aware of its limitations. Situations can sometimes evolve faster than the software can be updated and there are instances where it may therefore be necessary to intervene sooner.

Advances in artificial intelligence and machine learning will progress further in the future but currently there is no replacement for experienced individuals who are aware of the entirety of the supply chain, where the higher levels of risk exposure might be, are able to map these against concerning developing geopolitical developments and advise the business on appropriate risk mitigation strategies accordingly.

Self-disclosure without delay

Training and education of staff in the key skills necessary to protect the organisation is also vital. At the ICA we also need to respond to evolving situations, and we run a range of sanctions courses which are frequently updated.

On a positive note, the regulators acknowledge this is a particularly challenging area and even with the best training, comprehensive processes, software and suitably qualified individuals, occasionally mistakes will be made.

However, in these scenarios, regulators expect self-disclosure without delay, in addition to details of how the control framework will be addressed to ensure the problems don’t recur. These actions will be taken into consideration but if a more systemic problem is revealed through a local of focus in this area they will certainly take a different view.

Putting sanctions legislation into perspective, framework controls are now a matter for the whole senior management team and board members to ensure compliance with regulations and ultimately protect the firm across increasingly diverse supply chains and an ever-evolving geopolitical landscape.

Ross Savage is course director and global lead, sanctions compliance, at the International Compliance Association.

The International Compliance Association is hosting a three-hour live virtual workshop on managing sanctions risk on 19 July 2021.

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Studio Retail Group announces Caroline Ross to its Board as Independent Director

By Debbie Wright

Studio Retail Group announces Caroline Ross to its Board as Independent Director

September 16, 2021 by Olivier Dellacherie – Talent4Boards – UK, Accrington –  Studio Retail Group PLC (LON: STU), the digital value retail business, today announced the appointment of Caroline Ross to its Board as an independent non-executive Director, effective 27th September 2021. “I am delighted to welcome Caroline to the Board. Her expertise in developing colleague and culture agendas will further add to the skills and insight of the Board as we continue to focus on growing the Group’s digital value proposition.” said Board Chairman, Ian Burke. Caroline will also join the Remuneration and Nomination Committees. About Caroline Ross Caroline Ross is a highly experienced HR […]

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Webinar: what’s next for boards in financial services?

By Gavin Hinks

Forex graph behind boardroom

A glance at the business press reveals just how quickly the landscape is changing for financial services.

If it isn’t technology it’s the fall out from the global pandemic forcing boards to rethink their resilience and business strategy. Everything from the way staff work to the technology they, and customers, use presents financial services firms with major challenges.

That’s why Board Agenda has brought together an all-star cast of experts to explore the future for financial services firms and how they will adapt to a growing range of developments.

Clara Durodié, a board director, fintech expert and author on the role of artificial intelligence in business, is joined by Elizabeth Stheeman, a non-executive with Edinburgh Investment Trust and a member of the Bank of England’s policy committee, and Dr Kern Alexander, professor of banking regulation at the University of Zurich and author of the book Brexit and Financial Services.

Together the panel will map the developments affecting the sector and explore the likely response. And it is no small agenda. The pandemic has caused thousand of employees to work from home, raising a host of issues around cybersecurity and confidentiality. Remote working has also triggered a reappraisal of employee welfare, the management and retention of staff, and the way career progression will evolve in a hybrid working environment.

Elsewhere, the evolution of technology looms large. The continuing development of AI and blockchain both demand an intense focus from boards to make the right strategic decisions. The closure of branches and a switch to online service provision has raised real questions about the role of financial institutions in society.

There are a raft of questions for our expert panellists to answer.

The Board Agenda webinar ‘What’s Next for Boards in Financial Services’ takes place on 5th October GMT. Register for your free place now. 

 

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ACCA – Lay Members

By Debbie Wright

ACCA – Lay Members

Lay Members – ACCA Recruiter: ACCA Location: London (Greater) (GB) Salary: Remunerated Posted: 16 Sep 2021 Closes: 14 Oct 2021 Ref: 83937 Position/Level: Board Responsibilities: Executive Management Sector: Financial Services Contract Type: Permanent The Association of Chartered Certified Accountants (“ACCA”) – the global body for professional accountants – has long been at the leading edge of governance best practice with regards to regulation and discipline. It introduced lay oversight of its disciplinary arrangements in the 1980s and was the first accountancy body to open its disciplinary hearings to members of the public in the 1990s. ACCA supports 233,000 members and […]

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