While UK executive remuneration practices may well be ripe for reform, uncompetitive pay does not explain the dearth of London company listings, according to Andrew Woods, Responsible Investment Manager at Aegon Asset Management.
As UK regulators search for ways to make the London market more attractive both for companies and talent, Woods argues that remuneration is a notable but only secondary factor in the exodus of capital to other global financial centres.
He explains that, at the turn of the century, executive pay packages in the UK were relatively straightforward, typically consisting of a reasonable salary, modest variable remuneration (bonuses, options) and participation in a defined benefit pension scheme. Then, 20 years ago, and with the aim of improving transparency and accountability, companies were required to produce an annual remuneration report and to submit this to a shareholder vote each year.
“Like many well-intentioned ideas, there were unintended consequences”, says Woods. “Everyone knew what everyone else was being paid, and remuneration consultants were quick to spot an opportunity.”
“Decision-makers were routinely presented with benchmarking exercises designed to illustrate how underpaid their executives were. Not wishing to run the risk of executive departures, they generally took such ‘independent’ advice at face value.”
Woods says that the use of benchmarking is almost singlehandedly responsible for the relentless rise in executive pay that became the norm until the pandemic stemmed the flow – and that the upward pressure is now returning.
“Companies will often use inappropriate peer groups (whether that be sector, market cap or revenue driven peer groups) to illustrate how underpaid they are. At the same time, shareholders have not been entirely innocent, having consistently called for a greater degree of at-risk remuneration, thereby further increasing quantum.
“It took a global pandemic to apply the brakes to ever increasing pay. However, this has proved to be only a temporary blip, and this reporting season we have seen a continuation of the trend in a world in which inequality has never been greater and the cost-of-living crisis is disproportionately affecting the lower paid.”
While the Head of the London Stock Exchange, Julia Hoggett, has called for higher executive pay to bring UK remuneration in line with US competition, Woods believes that this alone will not be enough to reverse the exodus of talent from the UK, nor the lack of new London listings.
“It’s true that hiking executives’ pay is sometimes reasonable in order to remain competitive in a global market. UK companies will occasionally lose execs to better pay across the Atlantic, such as Reckitt Benckiser losing its CEO to Starbucks – but this is far less frequent than generally suggested. As for the IPO market, simply matching pay would achieve little to encourage listings, since the greater opportunities for access to capital in the US are a far greater pull.
“We believe the reticence to list in the UK is a complex issue and that pay is only part of the equation for companies that are truly global in nature. We will of course examine proposals on a case-by-case basis, recognising that remuneration is essential not just to retain individuals but to attract the best fresh talent as well. To use a footballing analogy, it is sometimes necessary to pay top dollar for true global superstars, but we are keen to avoid overpaying for averageness.”
