How much remuneration is too much remuneration?
It's one of the most tricky issues to tackle but rebellions over executive remuneration are unlikely to die down
Here’s a warning for corporate communicators tiring of having to explain to a sceptical media why their chief executive deserves his gargantuan pay: it’s about to get a lot worse. According to How Much Pay Is Too Much?, a report from financial PR agency Finsbury, two-thirds of UK listed companies will be putting a new remuneration policy to the vote in 2020.
We should therefore expect more headlines about fat cats and stunts involving inflatable pigs amidst a political and economic environment where there are likely to be few major pay rises outside boardrooms.
How should communicators respond? Can the levels of remuneration of top executives ever be justified or do public relations executives need to adopt new approaches? It’s an issue which has long frustrated senior communicators, who often have little to do with the actual decision-making.
‘The problem is that by the time we get involved, it’s really all about crisis communications,’ says Michael Sandler, chairman of financial PR agency Hudson Sandler. ‘We only get involved when there’s a backlash, which is actually statistically very rare. Indeed, there should not be a backlash because most remuneration has already been discussed with shareholders.’
Executive remuneration is also extremely complex, spanning basic salaries, pension entitlements, annual bonuses, share awards and long-term incentive plans. The jargon in which many remuneration policy reports and statements are drafted only serves to obfuscate matters.
‘The fact is that remuneration as an issue is quite statutory,’ says Andrew Grant, founder of Tulchan Communications. ‘Because remuneration relates to legal contracts, contains a number of different elements and goes through remuneration committees and consultation with remuneration advisers and shareholders, you tend to end up at a point where you are presented with a highly-complex document which is hard to summarise.
‘When it comes to communicators from the remuneration committee and the lawyers, there’s often little that can be done to change it. The other problem is that there is no right answer on pay. If you do well as a chief executive then no-one cares and if you don’t, it’s a stick to beat you with. There is no absolute right number for a CEO’s package.’
If you do well as a chief executive then no-one cares and if you don’t, it’s a stick to beat you with
John Bick, chief executive at financial communications firm Gable Communications, also sees the task of communicating executive remuneration as entirely situational. ‘It is always the case that executive remuneration is going to be controversial,’ he says, ‘because of some of the battles there have been in this area before. But you only normally see these sorts of things happening when there has been a turndown in the fortunes of a company after a period of fairly dynamic growth.’
That may not remain the case for long. Last month Namal Nawana resigned after 18 months as chief executive of healthcare group Smith & Nephew because his requests for higher pay in line with packages at US medical device-makers could not be met under UK corporate governance standards. Australian-born Nawana, who was based in Massachusetts, is said to have looked at the amounts bosses of similarly-sized US healthcare companies can earn and asked for a near doubling of his package of up to $7 million a year, including a $1.5 million base salary.
Nawana had previously disclosed that he took a pay cut to join the company but The Guardian newspaper was predictably unsympathetic. ‘If that’s not sufficient motivation to get out of bed in the morning,’ commented columnist Nils Pratley, ‘don’t take the job in the first place,’
Neither should Standard Chartered chief executive Bill Winters and chief financial officer Andy Halford expect plaudits for agreeing to halve their annual pension allowances from £474,000 to £237,000 and from £294,000 to £147,000 respectively. The move was made five months after 40 per cent of Standard’s shareholders refused to support the bank’s remuneration policy in May in protest at Winters’ pension.
Winters hardly helped quell the controversy by calling the protest ‘immature and unhelpful,’ while JD Wetherspoon executive chairman Tim Martin went a step further, attacking shareholder advice firm Glass Lewis after it recommended shareholders vote against the pubs company’s pay policy. Glass Lewis had raised concerns about a 15,4 per cent pay rise for the company’s finance director Ben Whitley, stating that it was the third consecutive ‘significant’ increase and that high pay risked becoming a ‘crutch’ if the group’s financial performance dips.
However, Martin accused the firm of ‘financial illiteracy’ and said it was talking ‘complete bollocks’ as Whitley, whose salary has risen to £220,000, was ‘an internal appointment who started from a low base’. Faeth Birch, managing partner at financial PR agency Finsbury and author of its pay report, sees such stories as a sign of what is to come.
‘2020 is going to be a big year for executive remuneration, which will create a lot of noise around the subject,’ she says. ‘I’ve been talking to a lot of the investment advisory groups and it’s clear that they also feel under pressure from wider society and government to make sure that they are seen to be doing their piece and ensuring that pay policies are responsible.’
While the best advice to Winters and Martin may have been not to comment at all, could better communications help their and other companies manage executive remuneration more effectively? Yes, says Birch. ‘At the larger companies that we work with, we get involved with remuneration policies as much as possible. I am in discussions right now with a number of companies about their policies. Often you can see trigger points, whether it is a new strategy or changes to the way they look at remuneration. ‘You know those trigger points in advance and if they have had a poor year of performance, you also have to think about how that might impact them.
‘Also, with regard to 2020, a new remuneration policy is a really big thing for companies. Ultimately, it has to properly reflect a company’s strategy. Companies need to make sure that it is portrayed in the right light and that investors see a clear link between strategy, performance and remuneration.’
Finsbury’s report advises communicators not to treat the remuneration report as ‘just another section in the report and accounts’ but to draft it as simply and clearly as possible.
They should also prepare a specific remuneration communications policy and proactively communicate if there is a positive story to tell about a remuneration policy driving performance.
A new remuneration policy is a really big thing for companies; ultimately it has to properly reflect a company’s strategy
In addition, the report recommends that communicators prepare for the verdicts of shareholder proxy vote groups and their inevitable media coverage, consider the impact on employees and expect commentary from third parties such as trade unions, political parties and the Church of England. The landscape for executive remuneration is certainly changing, with policies coming under increasing scrutiny from not just pay advice groups but ethically-minded impact shareholders and activist groups.
The Investment Association, which has long urged companies to bring executive pension allowance below 25 per cent of base salary, has set a two-year deadline for companies to comply with the UK corporate governance code and bring executive salaries in line with the rest of their workforces.
The lobbying organisation, which represents 250 fund managers with £7.7 trillion of assets, wrote to the remuneration committee chairs of all FTSE350 companies in October, warning them to address excessive or opaque pay deals or face shareholder scrutiny during the 2020 annual meeting season. It asked companies to look at simplifying pay structures, justifying the level of executive pay, strengthening policies for departing directors and broadening the provision of ‘clawbacks’ to recover bonuses from former executives.
While much of the work of such organisations concerns advising on processes and structures, another way of looking at pay was coined for Finsbury by Owain Service, co-founder of the Behavioural Insights Team at Cambridge University. He compares pay to ordering coffee, where most customers opt for a medium-sized cup because they consider it to be neither too big or too small.
In an experiment that changed the actual size of the middle cup to the one originally described as ‘large’, research found that most people still chose it because they still thought it was ‘just right’. Similarly, behavioural science suggests that perceptions of company leaders’ pay are all relative, says Service, with comparison sets changing as remuneration levels rise in one’s immediate circle.
This chimes with a survey in the Finsbury report that found 63 per cent of 11,000 people polled thought £800,000 in pay and perks was far too much – despite this figure being less than one-quarter of the average pay for FTSE100 chief executives ‘If you’re fortunate enough to earn £800,000 you don’t necessarily perceive of yourself as that well-off because your point of comparison is with people who are also remunerated very well,’ says Service. ‘In contrast, if you earn £10,000, you tend to hang around with other people who earn relatively similar amounts of money, so your point of comparison will be different.’
This might suggest that part of an effective communicator’s role is to ensure that their C-suite does not become isolated or remote and has constant reminders of ‘reality’ as other people see it. However, this is easier said than done. ‘It is incredibly difficult to say to a chief executive that he or she is paid too much,’ confides one senior adviser at a financial PR company.
If you’re fortunate enough to earn £800,000 you don’t necessarily perceive of yourself as that well-off because your point of comparison is with people who are also remunerated very well
Grant suggests that introducing different key performance indicators, such as a company’s actions on climate change, into the way that executive pay is calculated could help change perceptions. ‘What you can do as a communicator,’ he says, ‘is to endlessly highlight to management and boards how the debate about pay evolves and where there are examples of structures that have or haven’t worked or have been widely criticised.’
There are signs that some corporates are belatedly getting the message. Standard Chartered, for example, initially justified Winters’ pension pay by saying it represented only 20 per cent of his £2.4 million basic pay.
However, it calculated that percentage by including a matching award in shares. As a proportion of Winters’s $1.2 million cash salary alone, the pensions allowance represented 40 per cent, the highest level for any top executive at a listed British bank. After this methodology was highlighted, the bank acknowledged in its latest announcement that paying part of executive salaries in cash and part in shares had led to ‘some confusion’.
It said there are plans to improve its disclosure of remuneration to ‘explain how salary is set in the same way for all employees’.
Other companies may need to wake up and smell this new size of corporate coffee cup next year. It may not be to the taste of their executives but the reputation and therefore the future of the organisations may depend on it.