22 August 2022

High executive pay is no excuse for state intervention

By Len Shackleton

The High Pay Centre has just published its latest report on the remuneration of FTSE-100 CEOs. As usual, the report shows median pay which, by most people’s standards, is pretty colossal.

At £3.4 million, this figure is over 100 times that of the median UK worker and has increased since the pandemic. Given the cost-of-living crisis, this is seen by many as unacceptable, and the HPC press release has a wishlist of recommendations for intervention by the Government.

The HPC’s data – particularly the more detailed material which is not headlined in press reports, are always of interest. But do they justify yet more state intrusion into privately-owned businesses?

The High Pay Centre’s title may confuse. Unlike the Low Pay Commission, which its name seems to echo, it is not a government body with a clear and broadly objective remit. Rather it is a left-wing pressure group closely linked to the TUC.

Nothing wrong with that, of course, but it inevitably affects the presentation of its findings. For instance, the HPC’s press release points to a rise in both median CEO pay and the ratio to median worker earnings since the pandemic. This is unsurprising as companies resumed bonus payments which could not be triggered by depressed results during lockdown.

But both median pay and the pay ratio are considerably below the levels of five years ago. This is partly the result of shareholder activism since FTSE-100 companies were forced by Theresa May to reveal a clutch of new statistical information.

Casual readers of the HPC’s figures may think of the FTSE-100 as comprising ‘British’ companies, which the Government and pressure groups can boss around in response to the latest political whim without wider consequences. This mindset is widespread amongst MPs and the commentariat.

In reality, most of these companies are multinational businesses which could be headquartered anywhere. Although many have historic roots here, sentiment doesn’t cut much ice when 75% of all their revenue is derived from outside the UK. They are registered in the UK because our company law and broadly favourable investment climate has until now made this a sensible thing to do. This hugely benefits London as a financial centre, and boosts both UK employment and tax revenue.

But this could quite easily change if the Government, which has already increased company regulation frequently over the last decade, were to wade in with further controls driven by populism rather than economic analysis. Listing decisions are often finely balanced, as recent discussions over the corporate structures of Shell and Unilever have shown.

Fortunately both of these cases led to concentration on London, but the argument could have gone either way. FTSE companies are under no obligation to stay listed here. They could go private, as an increasing number of corporates have done, or they could choose to be listed on stock exchanges in New York or Frankfurt or other global locations. Employment and tax liability would follow.

These companies compete in international markets for goods, services and resources – including top managerial talent. In recent years around 40% of FTSE-100 CEOs have been foreign nationals and could work in other countries where pay packages are at least as generous, and in some cases more so.

The globalisation of the CEO market echoes that for sport or entertainment. Yet few question the pay of a Mo Salah, Lewis Hamilton or Ed Sheeran, who do far less for Britain than, say, the highly-paid CEO of AstraZeneca.

Imposing restrictions on CEO pay, or imposing trade union representatives on remuneration committees (as the HPC wishes) or on company boards (as the TUC wishes) would make working, investing and company listing in the UK much less attractive.

They might not even work. Germany, for example, has many of the controls which the TUC is looking for, such as worker representatives on boards, but CEO pay for similar-sized companies is comparable to that in the UK.

Inviting union representatives into every business – another demand made in the press release for this report – promises to add nothing to the productiveness of UK-based firms, particularly at a time when many unions seem to have reverted to a 1970s-style confrontational position.

The last thing we need just at the moment is militant union representatives laying down the law in company boardrooms. Their influence would not be confined to executive pay, but could be expected to fall heavily on investment and employment plans.

High levels of executive pay at a time of economic crisis may not be a good look, but we should be wary of crowd-pleasing political interventions which could backfire.

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Professor Len Shackleton is an Editorial and Research Fellow at the IEA and Professor of Economics at the University of Buckingham.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.