Can high executive pay agreements be justified in the current financial climate?

June 8th 2022 | Posted by Dave

Pay levels for executives in the UK have returned to pre-COVID-19 levels.

This recovery has happened following the reduction in CEO pay that occurred in 2020 when wages at CEO level fell to £2.8 million.

Not everyone is supportive of high executive pay agreements. For example, independent corporate governance and shareholder advisory consultancy Pirc recently advised shareholders to vote against Barclay’s senior remuneration packages. The result was nearly 11% of shareholders opposing the proposals. There has also been rebellion from other shareholders when it comes to executive pay.

Rebellion from some shareholders not preventing increases

There has been shareholder criticism of Greggs for its high executive pay levels. Other shareholder revolts have taken place at Ocado where almost 30% of shareholders voted against high pay for executives and GlaxoSmithKline where more than 38% of shareholders voted against raising annual executive bonuses from two times to three times their annual salaries.

Not every shareholder group has taken this type of stand. At Nat West, almost 93% of shareholders voted in favour of a pay package which could give the bank’s chief executive as much as £5.2 million annually.

It’s also worth noting that the trend for high executive pay is continuing despite a certain level of opposition.

How can executive remuneration packages be justified right now?

In some quarters there have been questions about how high executive pay levels can be justified given the current cost of living crisis in the UK.

In the case of Greggs, the company suggested that it was pitching executive remuneration levels at a rate that reflected the requirement for individuals to make a key contribution to the growth of the organisation.

There is also currently less concern from investors overall when it comes to rapidly increasing executive pay. There is more focus on areas such as climate and the environment which are vital governance and social concerns.

As these issues are integrated into corporate performance targets so they will form a vital part of executives justifying their high pay levels. They will need to drive the business forward in these areas in order to reach maximum bonus potential.

Finally, it’s important to note that many pay outs were already agreed last year when it was difficult to have foreseen the crisis that has since enveloped the country and the globe, and the awards include long-term incentives awards.

It’s entirely possible that ongoing financial difficulties will have an impact on these awards. This will especially be the case if companies fail to meet performance expectations.

It’s also interesting to note that many organisations have stated their intentions to attempt to raise pay levels for staff at all levels in addition to increases at executive level. If these intentions do not become reality, and the cost-of-living crisis continues to bite, pressure on companies to rein in spending on executive pay packages may increase, especially when performance targets fail to be met.

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