The CEO-takes-it-all trend is waning

Over the past three years, the FTSE 100 index has risen a measly 6 per cent.

Yet the chief executives in charge of the UK’s largest listed companies have received on average three-quarters of their maximum bonuses during that time — a proportion that has barely changed each year.

Share price moves are not the only measure of performance, but this must suggest CEO bonus awards are seemingly made regardless of how well or badly the companies have done.

These findings — from PwC — will not surprise a cynical public. They come hot on the heels of news that Stephen Hester could walk away with an £8.5 million (Dh47.45 million) payout from RSA after less than two years despite failing to improve the insurer’s share price after an accounting scandal.

Meanwhile, the pay gap between chief executives and their average employee continues to widen. Last year, FTSE 100 CEO pay rose by nearly 7 per cent — relatively restrained by the standards of recent years, but nevertheless substantially higher than the 2.4 per cent increase that the average UK worker received in the year to June.

That means the leaders of Britain’s biggest companies are now paid 183 times the salary of the average worker, up from 160 times five years ago, according to the High Pay Centre.

Most of the pay incentives offered to chief executives should be scrapped, the HPC says, as there is little evidence that performance-related pay schemes are, in fact, rewarding performance.

These trends are not just a UK phenomenon. Germany, not the UK, is where Europe’s corporate executives are the most richly rewarded, according to Belgium’s Vlerick Business School. And performance is not the biggest determinant of pay.

Instead, size matters: executives at larger companies in Germany, the Netherlands, France, Belgium and the UK, enjoyed higher pay, bigger bonuses and more generous pensions.

Hester, too, has his continental brothers. In France, Michel Combes has drawn public ire after leaving his job as chief executive of Alcatel-Lucent without seeing through its €16 billion (Dh65.63 billion) takeover by Nokia — but with a farewell payout reportedly worth nearly €14 million.

Confronted with such examples, it is easy to feel that the financial crisis has done little to change indefensible remuneration practices. But the public hoo-ha over them should, in fact, be taken as a sign of progress.

Not one, but two of France’s most senior ministers — Emmanuel Macron and Michel Sapin — felt moved to speak up against Combes’ golden parachute. More concretely, the French financial regulator may actually clamp down on such practices.

It is now looking into Combes’ severance package to check whether it adheres to governance rules, having already raised concerns over executive pay at Alcatel-Lucent.

Growing dissatisfaction among a range of stakeholders about the complexity and inefficacy of pay incentives is putting their long-term survival in doubt. At the same time, growing transparency and conditionality around performance-related rewards have made it far more difficult to get away with unjustified payouts.

In the UK, more than half of the FTSE 100 companies examined by PwC required executives to wait more than five years before they could access long-term rewards, and almost all had introduced clawbacks, so that bonuses could be reclaimed in cases of wrongdoing.

After a measure introduced by former business secretary Vince Cable, bonus targets must be disclosed — a level of transparency that has already tightened scrutiny of their justification.

Tom Gosling of PwC, who has advised European companies on pay for 16 years, says that remuneration committees are evolving rapidly in response to the public mood. He says the very fact that perceived payments for failure draw such an amount of ire is a sign of their relative rarity these days.

Some may be the legacy of contractual terms that would be unlikely to be approved today. Public comments like those of Macron’s in France should act as a serious deterrent to other boards tempted to follow Alcatel-Lucent’s example.

Shareholders and regulators still need to keep the pressure on. But the battle is half-won, not half-lost.

— Financial Times