More UK boards are raising CEO pay for their US rivals, marking a shift in sentiment among CEOs, bosses and investors who had previously been reluctant to get involved in the transatlantic pay wars.
London Stock Exchange Group is among the latest companies to seek shareholder approval for the pay package for its CEO David Schwimmer, which is being compared with US rivals, not British companies.
“When you look at compensation standards around the world, the United States is in a different place,” Schwimmer said this week. “This is an issue that companies competing on a global basis from a base in London need to take into account.”
Frustration among UK board members over the constraints on offering internationally competitive pay packages for senior executives has been simmering for years. Defaulting on executive pay could hamper a company's ability to attract and retain its most talented senior management teams, which some say risks exacerbating the downturn in UK capital markets.
Now there are signs that executive pay in Europe has reached a tipping point, with greater efforts by boards and shareholder concessions to close the gap with the United States.
“There has been a big change in thinking,” said Peter Harrison, chief executive of FTSE 100 asset manager Schroders. “More and more investors and boards are realizing that if we don't get executive pay right, there will be an impact on the UK's competitiveness. It's not just about listed markets, it's about creating an environment where founders want to grow their businesses here, and there is a culture in which It celebrates risk and success.
Indeed, some British companies lost their CEO due to wages. A notable example from 2019 was Namal Nwana's decision to resign from Smith & Nephew after 18 months because the UK medical device company could not meet his pay requirements. The company has continued to argue with shareholders over pay ever since.
And the higher multiples available elsewhere are amazing. When Laxman Narasimhan gave up his $7.5 million position as head of UK-listed household products group Reckitt Benckiser, he continued to run US coffee chain Starbucks for up to $28 million a year. LSEG wants to boost Schwimmer's current £6.25m package to £11m.
Other executives turn to private companies. A senior UK investment banker said there was “a bit of a brain drain” away from publicly listed companies towards private equity-backed companies. “I think a fair number of current CEOs will end their careers in private equity rather than take on another CEO's role… It's way more profitable.
Corporate executives, board directors and industry lobbyists said companies that raise executive pay as an issue with shareholders are those that have large U.S. divisions, American competitors, or whose senior employees are originally from or already work in North America. “I don't think a UK LLC or a German listed company will suddenly say: 'Oh, now we need to compete against the US in terms of [pay]said David Toch, a managing director at Alvarez & Marsal, who advises companies on executive pay.
British bank HSBC, pharmaceutical company AstraZeneca, consumer group Unilever and publisher Pearson are among the banks that have raised their leaders' salaries or are lobbying investors for support to do so.
The debate over executive pay is also accelerating in continental Europe, where carmaker Stellantis last week announced a 56 percent increase in pay for its CEO.
Ahead of the next AGM season, some company boards are proposing larger pay increases than in previous years, while shareholder groups are taking a more nuanced stance. “If you provide a strong justification, investors are more likely to listen,” one board member said.
A senior City stockbroker added: “There is now a much more understanding attitude from the big asset managers.”
The shift in sentiment gained momentum last year when Julia Huggett, who heads the London Stock Exchange, part of the wider group, called on investors to support higher executive pay to discourage companies from moving their stock market listings abroad, especially to the United States. and employee retention.
A FTSE boss said companies that earn “a small portion of their revenues in the UK cannot regulate their wages….” . . [according to] Local norms.” He added: “There's less waking up and smelling the coffee. If LSE wants to be a place where companies are international and not just UK-based… most people will want to hire CEOs who are US citizens – and you should To pay people according to where they live, work, and pay taxes.
About 82 percent of the FTSE 100's revenue comes from overseas markets. Average FTSE 100 CEO pay rose in 2021 and 2022, the last two years for which complete data is available. But their average wages of £4.44m in 2022 were lower in nominal terms than the £5m handed to their bosses 11 years ago, according to research by High Bay Research.
Bosses at US S&P 500 companies earned three times as much pay in 2022, earning an average of $16.7m (£13.6m at the time), according to the AFL-CIO.
“In the next two years we will see a small but significant number of [UK-listed] “Companies that will change the boundaries in terms of incentive levels but also the structure of how they are paid,” said Mitul Shah, a Deloitte consultant who specializes in global executive pay and incentive plans. He said the goal was not to match US pay levels, but was about “closing the gap” and that the issue extended beyond the top job. “Boards and presidents are concerned about their ability to retain their CEO and other senior executives.”
Consultants said companies were exploring incentives aimed not just at maximizing total pay for executives who hit their performance targets, but using so-called hybrid schemes that take loyalty into account when awarding stock.
Xavier Baeten, professor of rewards and sustainability at Vlereck Business School in Belgium, highlighted the unintended consequences of trying to compete in US markets, citing the example of Dutch-Belgian retail and wholesale company Ahold Delhaize, where the group's CEO received €6.5 million in 2022. While the US CEO – a division head – received €6.6 million.
“You can imagine that managing this and finding a good balance is a big challenge for boards,” he said.
Pay experts have warned that these types of situations create problems in the future — for example, if the head of a US division is a future CEO candidate. There will not be as much scope for a further pay increase as one might expect if taking the top job.
However, others downplayed the importance of this issue for the FTSE 100 as a whole.
“Where is the evidence that executive pay is not giving us the candidates we need in the UK,” asked Paul Drechsler, president of the International Chamber of Commerce.
While he acknowledged that there were some instances of companies where switching to the US as a standard was appropriate, “to say they set standards for everything is nonsense.”
Many of the chairs were opportunistic, he said. “If you're going to take this on, perhaps the remaining months of a right-wing Conservative government would be a good time to do it.”
He said the UK's competitive position was likely affected by political turmoil, unpredictable foreign policy and tax rules, as well as a lack of industrial policy. “We are not looking for a systemic solution regarding wages,” Drechsler insisted.
Another FTSE boss agreed: “The argument that the only way to compete against the US is to pay like it is is not a very useful position to take in current economic circumstances.” He added that scrutinizing companies' use of metrics that could lead to outsized CEO pay should be a greater priority.
Andrew Speake, spokesman for the Center on High Pay, also issued a warning, saying: “All an executive pay increase is likely to do is increase the pay packages of some of the richest people, while doing nothing to address the fundamental issues underlying the UK’s economic problems.” He said.
