On average, the typical FTSE 100 chief executive enjoys an annual reward package worth £4.5 million, according to research carried out by the CIPD and the High Pay Centre, an independent think tank. This is down on the £5.4 million that they enjoyed the year before. While a drop of 17% is significant, it would still take a full-time UK-based worker earning £28,213 (the median) 160 years to earn what an average FTSE 100 CEO is paid in just one year. Of course, if we use mean pay for full-time staff (£34,414) instead of the median, it would take only 132 years.

Review of exec pay in the FTSE 100

Our analysis, based on pay data contained in the annual reports published by UK’s largest listed companies for the financial year ending 2016, finds the ratio between FTSE 100 CEOs and the average remuneration package of their employees is 129:1. In other words, for every £1 the average worker is paid, their CEO receives £129. In 2015, this ratio was 148:1.

Using the benchmark of the typical annual pay enjoyed by a worker (currently £28,296 as measured by the mean for all full- and part-time employees), we find that 60 of the FTSE 100 CEOs are now paid more than 100 times than the average UK salary.

Gender diversity at the very top

Virtually all of these high rewards are enjoyed by men. While there are just six female FTSE 100 CEOs, there are eight men called David and seven blokes called Stephen or Steve. Even though women make up 6% of the FTSE 100, they earn just 4% of the total pay. On average, male CEOs in the FTSE 100 earn £4.7 million, compared with £2.6 million for women.

There are 148 females on FTSE 100 remuneration committees (RemCo), an 8% rise from last year, possibly in response to such initiatives as the 30% club and the Davies Review for Women on Board. However, nine firms still have no women on their RemCos.

Despite increasing female representation on RemCos, there are still just 30 female executive directors in the FTSE 100. Over three-quarters of FTSE 100 companies (77) have no female executive directors.

What has accounted for this fall?

One explanation is that it has become difficult for firms to justify further growth in chief executive remuneration, especially when wage progression for the rest of the UK workforce has remained subdued.

Another reason is that politicians have become more interested in executive remuneration. In her speech to launch her leadership campaign last year, Theresa May highlighted and criticised the expanding gulf in rewards between those at the top and those who were just about managing.

Following on from this, there have been various reviews of corporate governance, such as the House of Commons’ Business, Energy and Industrial Strategy Select Committee inquiry or the Parker Review Committee report into UK board ethnic diversity.

Against this backdrop, investors have become just as interested in the amount of CEO pay and its ‘fairness’ as the design of the executive remuneration package itself, both in terms of its complexity and its alignment with corporate performance and purpose.

This interest has resulted in some shareholder rebellions at annual general meetings. However, firms have also been more likely to engage with their investors in order to arrive at some sort of consensus before making their pay recommendations. In some instances, firms have even withdrawn their proposals before the vote has taken place.

What role should reward and payroll professionals play in CEO reward?

We should always question what our organisation is rewarding, why and how, to ensure value for money. However, we should also recognise that pay is an emotive topic, and the insights from behavioural science show that employees are just as interested in the fairness of pay outcomes as they are in how these outcomes have been arrived.

Workers recognise that being a CEO is a demanding and responsible job that deserves a higher salary than other less senior roles. What they are less certain about is the extent to which organisational success is largely due to the individual at the top, rather than the rest of the workforce.

As our economy has changed to become more innovative and knowledge-based, business performance is now more of a collective endeavour. However, in many instances, our reward practices have not kept pace. Instead of being aligned to the new business reality, performance-based pay is still focused on a few at the top, often using a narrow set of financial measures, some of which are largely outside the actual control of CEOs.

The issue is that reward, especially executive reward, is too often seen as a technical discipline, which is separate from the way we manage and develop the rest of the workforce. Yet reward should be at the heart of HR, not semi-detached from it. Reward professionals should be working with colleagues, not just on the design of reward, but also about how we communicate with them about what is valued and how it will be subsequently rewarded and recognised as well as taking into consideration employee hopes and concerns.

What can companies do?

Among our reporting recommendations, we would encourage companies to disclose:

  • their FTE figures alongside their headcount numbers, and include a breakdown by region of both FTEs and staff costs so a comparison of UK-only pay ratios can be made;
  • employee figures for contractors as well as permanent staff, for a deeper understanding of the true size of the business;
  • pay ratios within their organisation. This can include the ratio from the highest to the lowest paid employee, pay ratios between management tiers as well as the ratio between the pay for the CEO and the median worker;
  • a graph showing the skew of a company income distribution over time to show if it is becoming more evenly distributed or not; and
  • how they invest in, lead and manage their workforce for the long term.

About the author

Charles Cotton, Senior Performance and Reward Adviser

Charles has recently led research into the business case for pensions, how front line managers make and communicate reward decisions, and managing reward risks, as well as the creation of a good practice guide on the annual pay review process. He is also responsible for the CIPD’s public policy work in the area of reward and is a Chartered Fellow of the CIPD.

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