CEOs might say that they have earned their windfalls. After collapsing during the initial lockdown phase of the pandemic, when many executives took pay cuts as millions of workers were furloughed, corporate earnings have more than recovered to be comfortably higher than at the end of 2019. In the private economy, it is for owners to decide what they think their managers are worth. If shareholders are happy with the performance of their hired agents, then who is to argue? The data suggest they are indeed satisfied. Boards of directors have achieved 95% votes in favor of remuneration reports, according to the PwC study, which is based on the 97 published by FTSE 100 constituents and presented for approval during the 2022 annual general meeting season.(1)
Quite why they are so content is a little harder to explain. Some 15% of CEOs were still subject to salary freezes this year, down from 43% in 2021. Moreover, 38% received a percentage increase that was below that of the wider workforce, with 56% getting a raise in line with employees. It’s the bonuses that merit closer scrutiny. These paid out at higher percentages than before the pandemic, according to PwC (which didn’t name individual companies). While this was driven by a post-Covid boom in some sectors, in others it reflected “performance targets which were conservatively set in 2021 to reflect greater market uncertainty.”
In other words, everything went pear-shaped when Covid hit, so companies dropped the bar for their CEOs. When things returned to something approaching normal, those reduced targets were easily hit. The asymmetry is clear. Executives weren’t responsible for the devastation of a once-in-a-century global pandemic, so didn’t deserve to be penalized unduly for something that was beyond their control. But neither were they responsible for the end of the pandemic, so did they deserve to be rewarded so handsomely for the recovery? Heads I win, tails I don’t lose.
What makes the acquiescence of shareholders harder to fathom is the FTSE 100’s persistent failure to break out of its rut of relative underperformance. Earnings may have recovered, but market performance hasn’t. The S&P 500 has provided a total return including reinvested dividends of almost 30% since November 2019 even after this year’s correction, while the MSCI World Index has returned about 20%. Anyone who invested in the FTSE three years ago has seen no gain at all, at least in US dollar terms.
Under the liberal market orthodoxy that has prevailed for the best part of half a century in the UK and US, excessive executive compensation shouldn’t be a cause for concern. Companies theoretically compete in a free market for the best talent available, and the rewards of their leadership will justify what is paid. (Conversely, companies that make bad hiring decisions will suffer the consequences; in any case, the market can be trusted to decide.)
In truth, that theory has been wearing thin for decades, eroded by a growing body of academic literature and amid increased attention to the widening gap between the top 1% (or 0.1%, or 0.01%) of earners and everyone else. In the US, the ratio of CEO pay to that of the average worker ballooned to 399-to-1 in 2021 from 20 in the mid-1960s, according to the Economic Policy Institute, a union-affiliated think tank. In the UK, the ratio by one measure was a far more modest 109-to-1 last year. Either way, it’s hard to believe that CEOs have really grown so much more valuable relative to the average worker.
One theory for why CEO pay keeps rising in defiance of apparent economic and market logic is known as the “Lake Wobegon effect,” named after radio host Garrison Keillor’s mythical home town in Minnesota, where “all the children are above average.” No company wants to acknowledge having a below-average CEO, giving each an incentive to pay more than or at least match the median at comparable businesses. That fuels a perpetual upward spiral of wages.
The free-market approach to CEO pay is linked to the concept of shareholder value — the idea that the a company’s only objective should be to maximize the wealth ofits investors. But this ethos is losing influence after decades of increasing inequality. More UK companies are including environmental, social and governance, or ESG, targets in their incentive plans for chief executives. That in itself is an acknowledgment that businesses have wider societal obligations beyond strict legal requirements.
The zeitgeist is changing. Since 2019, all listed companies with more than 250 UK employees have been required to publish the ratio of the CEO’s remuneration to the wages of its local workers at three different points across the salary spectrum. “We will improve incentives to attack the problem of excessive executive pay and rewards for failure,” read the 2019 election manifesto — not of the socialist-leaning Labour Party but the ruling Conservative Party, for which free enterprise is a guiding principle. Inequality is seen less these days as an issue solely of social justice, but also as a problem for the functioning of capitalism. Contrary to the free-markets and deregulation doctrine that helped drive income disparities from the 1980s onward, a more even spread of wealth may be good for economic growth.
UK pay packets are, admittedly, puny relative to those in the US, where you’d need more than $250 million even to get into the top 10 (Tesla Inc. founder Elon Musk topped the lot last year after exercising $23.5 billion of stock options. The Economic Policy Institute excluded him from its 2021 survey because he would have skewed the data too much). But then the US has produced world-leading technology giants, and steadily superior stock-market returns.
The UK has no such consolation, only a cost-of-living crisis and fiscal crunch to worry about. In these conditions, the CEO pay bonanza looks increasingly out of sync with the times.
More From Bloomberg Opinion:
• Have the UK’s Keystone Cops Hit Peak Chaos Yet?: John Authers
• Consumers Are Starting to Crack Under Inflation: Andrea Felsted
• Wall Street Bonuses Contain an Inherent Risk: Jared Dillian
(1) Investment trusts were excluded.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Matthew Brooker is a Bloomberg Opinion columnist covering finance and politics in Asia. A former editor and bureau chief for Bloomberg News and deputy business editor for the South China Morning Post, he is a CFA charterholder.
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