Executive pay

Large listed companies in the UK are required to publish CEO pay ratios and to give a clear rationale and explanation of why and how executive remuneration levels are fair and appropriate. 

Between 2011 and 2023, median CEO pay in the FTSE 100 has moved between a low of almost £3.8 million and a high of just under £4.2 million, though in 2020 the median was £2.5 million, reflecting the financial consequences of the global pandemic. In 2023, the typical FTSE 100 CEO earned 120 times more than the average (median) full time UK worker and 119 times more than the average (median) UK worker. Though there are claims that CEOs are not paid enough in the UK and their pay packets are overly scrutinised, which puts some firms at a recruitment or retention disadvantage when compared with US-based firms, or those businesses that are not publicly listed.

Executive remuneration practices are important because they can have a ripple effect across the whole economy, since smaller firms often use them as a benchmark.

When CEOs receive pay packages that the public considers excessive and which organisations fail to justify, it can undermine trust in business. Levels of executive pay that are seen as uncalled-for can also damage employee morale and motivation – perhaps not surprising given the average (median) UK worker’s earnings in April 2024 bought them £4.60 less in real terms than they did in April 2008.

But while the amount CEOs are paid attracts a lot of scrutiny in some parts of the world, less attention is usually given to how they’re paid and the behaviours their pay packages are supposed to recognise. Firms often find it challenging to connect their business strategy to their remuneration strategy, or to demonstrate a clear link between CEO pay and an organisation’s overall performance. It’s common to see companies discussing environmental, social and corporate governance (ESG) measures as part of their business strategy but giving CEOs very little incentive to act in the interests of a wide range of stakeholders. What’s more, research suggests flaws in the theories that underpin most executive reward packages.

How an employer rewards all its people sends a clear message about what it values, so organisations should report on employee reward transparently and candidly. Businesses and investors often say that a company’s people are its most important asset, as well as posing one of its greatest risks. But most CEOs are not adequately incentivised to manage and develop that asset, raising concerns about the decisions they may take when faced with conflicting priorities.

Including sustainability targets in a CEO’s remuneration package helps demonstrate that these issues are a priority at the highest level of the organisation. The investments a company makes in the management, development and reward of its people will ultimately contribute to the organisation’s business growth, but we’d also like to see more CEOs specifically and directly incentivised for making such investments.  

To ensure that executive remuneration is aligned to company purpose, culture and values, and clearly linked to successfully delivering the firm’s long-term strategy, RemCos need a broader responsibility for governing people and culture. In particular, we’d like to see them look at a wider range of measures to assess and reward success, in order to encourage the kind of business behaviours that benefit firms, employees and the wider society.

Against the backdrop of the anaemic growth in real pay, executive pay decisions will be scrutinised. Responsible leaders, working hard to meet the needs of all their stakeholders, will have little trouble justifying their pay packages. But disproportionate pay for those at the top, while front line workers face job losses, cuts to their benefit, and stagnant earnings, will undermine trust in business – among the workforce, customers and wider society.

• Boards should broaden the remit of their RemCos beyond CEO reward. This could entail replacing the RemCo with a 'People and Culture Committee', or formally broadening the scope of the RemCo to adopt a broader, more strategic role in overseeing workforce issues (such as diversity, skills, stability and morale) that both influence pay levels and are, in turn, shaped by them. To support this, boards should review the composition of their RemCos, ensuring greater representation of professionals with HR and people management experience, as well as representatives of stakeholder communities, including the company’s workforce.
• Companies should demonstrate in their annual reports, and through communications with their workforces, how their pay practices (including executive remuneration) relate to their strategy for people management and corporate culture, as well as how they relate to broader sustainability requirements.
• People professionals should work with RemCos to explore with their stakeholders which people metrics, as well as other ESG measures, should be used to reward, recognise, and incentivise senior executives and why. Companies should invest in their HR analytics capability to support this.
• RemCos should explore the latest evidence on executive reward and consider whether long-term incentive plans (LTIPs) are always the best way to remunerate CEOs, or whether smaller but more immediate incentives would be a more effective way to incentivise the behaviours they want to see in senior leaders.