Do we need to talk about executive compensation?

It was recently reported that the bosses of Britain’s biggest companies took home £5.5 million in remuneration for 2015. This equates to a 10% increase in salary on the previous year. Stories about executive compensation have cropped up regularly in recent times and come under more intense scrutiny especially since the 2008 financial crisis. 

However the majority of U.K. employees are likely to see only a 1.7% increase in wages over 2016. Not only is the actual percentage increase much less but the additional amount earned is also only a fraction of what Britain’s top bosses will receive. So just how richer are executives than the majority of employees? And is the income discrepancy justified?

“The standard economic theory of executive compensation is the principal-agent model. The theory maintains that firms seek to design the most efficient compensation packages possible in order to attract, retain, and motivate CEOs, executives, and managers.” – Martin Conyon

At the time of writing, FTSE 100 CEOs have earned approximately £2,972,632 so far this year. This compares to £16,620 currently earned by those living on the average salary in the U.K. The increasing discrepancy in earnings can be viewed in real time here. Executives earn 300 times their lower level employees do and this has been the case since the late 1990s.

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Figure 1. Top executive pay outs for the previous two years. Available for view at the high pay centre’s website.

The highest paid chief executive in 2015 was Martin Sorrell who took home £42.98 million. However other CEOs have faced challenges to their payouts. Shareholders at BP’s annual meeting rejected Bob Dudley’s £13.8 million pay package in April. This controversy came on the back of a year where BP recorded £4.5 billion in losses at year-end and axed 7,000 staff. In a pay-performance scheme, poor years for the business would normally be reflected in poorer executive remuneration.

“One of the most popular ways to evaluate executive compensation is by comparing pay versus performance. Unfortunately, many executives are given raises and bonuses even when their companies are faltering.” – Justin Kuepper

There are a number of justifications put forth for such high levels of executive compensation. Attracting the most innovative candidates, incentivising senior management and pressure from peers to follow suit are all reasons behind companies offering such lucrative pay packets. A good senior executive, it has been posited, is simply worth the money.

In sum it is clear that there are vast amounts of wealth among top-level business people. On last year’s earnings alone, Mr Sorrell could personally bankroll deposits of £14,100 (5% of current average house price) for 3,048 households. However it is also the case that CEO’s will continue to receive generous pay packets during difficult and even negative periods for their business, as the pressures they are under demand such lucrative returns.

Click here for High Pay Centre, an independent non-party think tank established to monitor pay at the top of the income distribution.