Labour Research December 2016


Fat cat pay continues to rise

Top executives' remuneration packages have continued to ratchet up, albeit at a slower rate. Prime minster Theresa May has promised to address executive pay and shareholder accountability, but has pulled back on her promise of workers in the boardroom.

A Labour Research analysis of remuneration in the boardrooms of the top 350 companies ranked on the London Stock Exchange shows 513 executives were on at least £1 million a year.

The top 20 earners are shown in Table 1.

Table 1: Top 20 executives ranked by total remuneration

Executive Company (financial year end) Total 
remuneration (£000) % change
Sir Martin Sorrell WPP (12.15) 70,416 64.9%
Ian Watson Hansteen (12.15) 27,819 2,408.0%
Morgan Jones Hansteen (12.15) 27,816 2,415.0%
Rakesh Kapoor Reckitt Benckiser (12.15) 23,191 81.5%
Tony Pidgley Berkeley (4.16) 21,489 -7.8%
Flemming Ornskov Shire (12.15) 14,114 421.7%
Bob Dudley BP (12.15) 12,820 19.6%
Kris Hagerman Sophos (3.16) 12,352 992.5%
Paul Richardson WPP (12.15) 11,523 2.7%
Rob Perrins Berkeley (4.16) 10,993 -11.0%
Erik Engstrom RELX Group (12.15) 10,869 -37.7%
Mike Wells Prudential (12.15) 10,031 -19.1%
Michael Dobson Schroders (12.15) 8,905 9.2%
Frierich Joussen TUI Travel (9.15) 8,811 204.6%
Antonio Horta-Osório Lloyds Banking Group (12.15) 8,539 -21.1%
Peter Crook Provident Financial (12.15) 8,455 28.2%
Pascal Soriot AstraZeneca (12.15) 8,397 139.4%
Bill Winters Standard Chartered (12.15) 8,393 n.a
Paul Polman Unilever (12.15) 7,582 8.8%
Stuart Gulliver HSBC (12.15) 7,340 -3.7

Since Labour Research resumed examining executive pay in 2014, Sir Martin Sorrell, chief executive of the advertising and PR group WPP, has headed the table of highest paid FTSE paid executives.

And such is the growth in his remuneration package that the gap between him and the second highest paid executive has grown considerably. Sorrell’s 2015 remuneration package, worth £70.42 million, is £42.6 million ahead of the £27.82 million package of second placed Ian Watson, joint chief executive of property group Hansteen. 

Last year the gap was £19.68 million between Sorrell and Tony Pidgley, founder and chief executive of housebuilder Berkeley, with Sorrell’s package worth £42.97 million to Pidgley’s £23.3 million.

In our 2014 survey, the gap between the £29.85 million earned by Sorrell and the £14.11 million of second placed Stephen Stone, chief executive of housebuilder Crest Nicholson was £15.74 million.

In our 2016 survey, third place goes to Morgan Jones, the other joint chief executive of Hansteen, while Rakesh Kapoor, chief executive of the Dettol-to-Cillit Bang household goods group Reckitt Benckiser, had a package worth £23.19 million. Tony Pidgley of Berkeley slips from second place last year to fifth place this year with a package worth £21.5 million.

The Labour Research analysis is based on the remuneration reports of these companies, which have to publish an audited “single figure” for the remuneration of each director. 

The remuneration reports also have to provide a breakdown of how the single figure is arrived at and includes: basic salary, cash bonus, long-term share bonuses, golden handshake, pension payments and a cash figure for other benefits that directors receive, such as use of company car, life insurance, private health benefits and housing allowance.

A breakdown in remuneration bands for 513 executives in the latest survey and the 535 executives included in last year’s survey is shown in Table 2. 

Table 2: Number of executives ranked by total remuneration

Total remuneration Latest year survey Cumulative total 2015 survey Cumulative total
£20m+ 5 2
£10-£20m 7 12 11 13
£5m-10m 37 49 46 59
£4m-£5m 32 81 46 105
£3m-£4m 56 137 54 159
£2m-£3m 130 267 112 271
£1m-£2m 246 513 264 535

The table shows that numbers in the top four bands were down over the year. Numbers increased in the £3 million-£4 million and £2 million-£3million brackets, while numbers in the £1 million-£2 million band fell slightly.

The fall in overall numbers is due in part to an increasing number of mining and investments companies in the FTSE 350, which are excluded from the survey, while the fall in the top four bands is also due to some executives dropping down as smaller long-term bonuses were paid in the latest financial year than in the previous year. 

The fall in the £1 million-£2 million bracket is in part is due to some executives dropping out of this year’s survey as well as smaller long-term bonuses being paid in the latest financial year than in the previous one. Nevertheless, the total remuneration bill for the 513 came to £1.51 billion — an average package of £2.95 million against last year’s survey total of £1.56 billion for the 535 executives — an average package of £2.91 million. 

The median (or midpoint) remuneration package was £2.08 million against £2.04 million in last year’s survey.

Recent figures from the Office for National Statistics (ONS) Annual Survey of Hours and Earnings 2016 showed that the median salary of a full-time worker was £28,213 in 2016 against £27,615 the year before. That means a median executive package was almost 74 times larger than the average worker’s salary in 2016, with the multiple unchanged on the year before.

In this year’s survey, year-on-year comparisons could be made for 404 executives. The median rise in their packages was only 1.4% — down on the 8.1% rise in last year’s survey. Despite this fall, 31 executives were nevertheless awarded rises in their remuneration packages of at least 100% on the previous year. 

Three of the rises were of at least 1,000%. Morgan Jones and Ian Watson, the joint chief executives of property group Hansteen, saw their packages soar by 2,415% and 2,408.5% respectively as they received share awards worth over £27 million each in 2015.

A share award was also responsible for the 1,017.5% growth in the package of Philip Monks, chief executive officer at banking group Aldermore.

Where comparisons could be made, overall 219 out of the 404 saw their remuneration packages grow over the past two financial years.

The variability in long-term incentives might have dragged down the median rise of the £1 million-a-year executive this year. However, remunerations committees have been bumping up the basic salaries of these executives. 

This year, the median rise in basic salary was 3.0% and regular pay rises in the whole economy have ranged from 1.4% to 2.3% since September 2015, according to the ONS.

Shareholders' dissent

Shareholders' dissent over remuneration policies has continued in the year under review with significant opposition votes on advisory resolutions to approve the remuneration reports of UK listed companies. For example, Sir Martin Sorrell’s remuneration package comes under regular attack from shareholders, and WPP’s 2016 annual general meeting in June was no different. However, despite opposition to his package rising from 22% of shareholders in 2015 to a third of shareholders this year, Sorrell got to hold on to his substantial remuneration.

In April, BP shareholders rejected a pay package of almost £13 million for chief executive Bob Dudley at the oil giant’s annual general meeting. Just over 59% of investors rejected Dudley’s 20% increase which he received despite falling profits and job cuts in one of the largest rejections to date of a corporate pay deal in the UK.

Just hours later, more than 50% of investors voted against remuneration deals at the medical equipment group Smith & Nephew. Nevertheless, neither majority vote compelled the respective boards to act as the vote was advisory and non-binding.

The 2016 season did, however, see the first defeat of a binding remuneration policy vote at a former FTSE 350 company. In one of the most significant votes, engineering firm Weir Group lost a plan to bring in a lucrative share deal for its top executives. More than 72% of shareholders voted down the pay policy which could have seen bosses take home millions in share options regardless of how well the company performed.

Worker representation on company boards

Speaking at the CBI employers' annual conference last month, prime minister Theresa May said that the government would publish a Green Paper in the late autumn "that addresses executive pay and accountability to shareholders, and how we can ensure the employee voice is heard in the boardroom". 

May had spoken of her support for worker representation on company boards, both before her election as leader and in her speech to the Conservative Party conference in October as prime minister.

However, she told the CBI: "While it is important that the voices of workers and consumers should be represented I can categorically tell you that this [Green Paper] is not about ... the direct appointment of workers or trade union representatives on boards."

May's speech dismayed the TUC, as workers on company boards has long been a TUC demand. 

TUC general secretary Frances O’Grady said: “Theresa May made a clear promise to have workers represented on company boards. 

"The proposals in her speech do not deliver on this. This is not the way to show that you want to govern for ordinary working people."

In October, the TUC set out its stall in a paper — All aboard: making worker representation on company boards a reality. The paper points out that one FTSE 350 company — the transport company Firstgroup with over 110,000 employees — has had an employee director on the board since its foundation. Mick Barker serves as the “employee director”, and has worked as a railwayman for 39 years.

TUC general secretary Frances O’Grady said more workers on company boards would “inject a much-needed dose of reality into boardrooms".

The TUC says that worker representation on boards would bring people with a very different range of backgrounds and skills into the boardroom, which would help challenge “groupthink”.

Workers would bring the perspective of an ordinary worker to bear on boardroom discussions and decisions; evidence from countries with worker board representation shows that this is particularly valued by other board members. The paper points out that the UK is one of a minority of European countries with no rights for workers’ voice within corporate governance. 

In 19 out of 28 EU member states, there is some provision for workers’ representation on company boards, and in 13 of these countries the rights are extensive in that they apply across much of the private sector.

Countries with strong workers’ participation rights perform better on a whole range of factors, including employment rates and expenditure on research and development, while also achieving lower rates of poverty and inequality, the TUC says. It adds that if the political will is there, the policy could be on the statute books within 12 months.

Any new law should apply to all firms with workforces of over 250, but this could be phased in gradually, starting with larger businesses.

And the paper calls for a third of company board members to be worker representatives, who should be directly elected by their colleagues.

Business practises driving up inequality

The Oxfam charity has backed the TUC’s call on worker representation in its own briefing on inequality in the UK. It found that continued increases in wealth inequalities in recent years and the failure to properly tackle the large increase in income inequalities that occurred in the 1980s have left the UK with an unequal economy that is not working for everyone.

The briefing found that companies have driven up inequality by working for the benefit of their senior executives and shareholders to the exclusion of their staff and broader society. 

More often than not, profits are accrued at the expense of workers and society at large. For example, it said that dividends paid by UK companies have rocketed from 10% of profits in the 1970s to 70% today.

Oxfam said that addressing the practices of big business — from closing wage gaps to incentivising investment in their staff to making sure they pay their fair share of taxes — should be a central part of the government’s plans to even up the economy.

The charity sets out four action points to achieve this. It calls for a greater voice for employees through representation on company boards.

Meanwhile, to address pay disparities, it calls for the adoption of pay ratios to help curb excessive pay at the top while addressing pay levels at the bottom. 

Thirdly, it says the government needs to support employers — in particular those in low-paying sectors that employ large numbers of women, such as retail, childcare and social care — to provide opportunities for flexible employment and progression for staff to boost living standards and tackle in-work poverty.

And finally, says Oxfam, the government needs to put an end to the era of UK-linked tax havens, which allow rich individuals and companies to avoid paying their fair share to society.

• The Labour Research survey covers the FSTE 350 companies, but excludes mining companies as they have no UK operations, and investment trusts where the boardroom is usually made up of part-time, non-executive directors who are paid accordingly. 

The survey also set a total remuneration cut-off point of £1 million. So anyone below £1 million wasn’t included in the analysis.

Where remuneration reports give a remuneration figure in dollars or euros, the figure has been converted to sterling using the average exchange rate for that company’s financial year.