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Should UK bosses get paid more like their US counterparts? Concerned about their ability to attract and retain talent and the competitiveness of companies in Britain, many boards and investors are now increasingly willing to benchmark executive pay against their higher-earning peers across the Atlantic. After years of avoiding this thorny issue, this is a notable shift in approach.
This is partly due to the growing foreign footprint of FTSE 100 constituents. More than half of these companies are considered highly international, generating revenue from four or five geographic sectors, according to an analysis by consulting firm Deloitte; A quarter of these countries have a “significant” American presence. Many of them already have senior executives from or based in the United States. Some British companies have lost their chief executives to US or other competitors, or lost out in recruitment races. Similar concerns are heard in continental Europe.
Discussions are particularly intense in innovation-led sectors that have outperformed the broader index, such as technology and pharmaceuticals. Executive salaries at major companies indicate how success is rewarded, influencing founders' decisions about where to develop a growing business. Although Brexit, political dysfunction, lack of a coherent plan for growth, and a complex tax system pose greater barriers to UK competitiveness, some have linked executive pay to Britain's attractiveness as a place to list. Julia Huggett, chief executive of the London Stock Exchange, warned last year that a host of companies were moving to New York.
However, rising wages for senior employees are not the only reason for the enviable dynamism of US companies – and there are serious dilemmas here for the UK. The rise in US bonuses and the overemphasis on stock-based bonuses has exacerbated income inequality and the rise of the super-rich, which has harmed American democracy. Britain retains a great deal of cultural sensitivity to red-blooded, American-style capitalism. However, concerns about shifting too much towards the US model must be balanced with the reality that UK business is part of an American-dominated global capitalism.
British companies are already facing pressure due to the gap between the pay of CEOs and ordinary workers. Pay for managers in the FTSE 100 rose by 16 per cent on average in 2022, taking their earnings to 118 times the earnings of the average UK worker, according to the Center for High Pay. Bosses earned an average of £3.91m, up £530,000 on 2021. Wages in the UK remain competitive with many major markets. But it lags far behind the US, where S&P 500 company bosses will earn an average of $16.7m (then £13.6m) in 2022.
No one wants to see CEOs of mid-sized companies become billionaires as a result of straightforward, comprehensive metrics, or serendipitous rises in stock prices that they had nothing to do with. But there is an argument for UK CEO pay being set on a case-by-case basis, rather than a one-size-fits-all approach. Where there is a compelling justification, investors should give boards some flexibility.
We should not imitate the less attractive elements of the American system. Short-term-focused pay scales and excessive compensation for CEOs should be avoided. We should not treat companies in cyclical industries such as commodities in the same way as, say, biotechnology companies. When corporate strategies go awry, remuneration committees need to curb excessive amounts of pay.
While companies reward leadership excellence, they need to remain sensitive to the cost-of-living challenges facing most segments of society. The fruits of the company's success should be shared by employees, not just bosses and shareholders. But in a global economy, it is unrealistic for British companies to remain completely insulated from what is happening across the Atlantic.
