Has Excessive Pay Finally Had Its Day?
Post written by Professor Alexander Pepper, Professor of Management Practice at LSEs Department of Management and a former Partner at PricewaterhouseCoopers. He is currently writing a book about business ethics, inequality and executive pay. getty  In 1999, New Labours chief strategist, Peter Mandelson, told the City: We are intensely relaxed about people getting filthy rich as long as they pay their taxes.  To many, this came to symbolize an era of excessive executive pay. For the next 15 years, top pay in Britain's largest companies would rise rapidly - at about 11% each year on average - while all-employee pay would grow by just 2.5%. Top companies behaved as if they were in an arms race. The government, rather than take a public position, regarded executive pay as a private matter for institutional investors and other shareholders to handle. But institutional investors showed little interest in changing the status quo  after all, the amounts in question were relatively small in the context of their billion-dollar investment portfolios. Fast-forward, however, to 2020 and CEO pay among the UKs top 100 had first flatlined and then fallen  by over 15% from its highest point in 2014. Two events in particular have marked the change. In 2017, one of the largest investors in the UK stock market, Norges Bank Investment Management (NBIM), which manages the Norwegian sovereign wealth fund, publicly criticized over-inflated CEO salaries and proposed a new way of paying those at the very top. A substantial proportion of total annual remuneration should be provided as shares that are locked in for at least five, and preferably ten, years, regardless of resignation or retirement, the funds position paper read. Requiring the CEO to invest a meaningful part of his or her remuneration in company shares is a simple and transparent way of aligning the interests of the CEO with those of shareholders and of wider society.  A year later, The Weir Group replaced its long-term incentive plan with a less valuable restricted stock plan. Other leading companies, including BT Group and Burberry, followed suit and gave their top leaders restricted shares, rather than another pay increase. By 2019, BlackRock, the worlds largest asset manager, had issued a statement urging shareholders of public companies to moderate excess pay. Meanwhile, institutional investors had started to treat excessive executive pay as a serious reputational issue. Increasingly, large UK companies are replacing highly-leveraged long-term incentive plans with less generous longer-term restricted stock plans like The Weir Group's and in line with the recommendations of NBIM. Its also true that massive government financial support for companies provided during the pandemic has made over-inflated pay among executives even more unpalatable to investors and the public alike. Interestingly, my research shows that executives at the top are certainly not, for the most part, the unethical egoists popular culture likes to make them out to be; instead, they have simply been the fortunate beneficiaries of a system that has been running out of control. When, in autumn 2016, along with my co-researchers Susanne Burri and Daniela Lup, I asked 1,100 top executives from across the world - all of whom were among the 10% highest paid in their country - whether theyd be content to be paid less, the majority replied that they would, as long as those at the same seniority as them in other firms were too. The research shows executives at the top fall into four tribes - relational egalitarians for whom fairness is the most important thing; welfare liberals who are prepared to see differential rates of pay as long as the poorest are looked after; meritocrats who believe that those who work hardest or are more able should within reason be paid more, and free marketeers who have ultimate faith in the way the markets work. Very few appear to be on the make. In the recent past, companies have too readily accepted the premise that if they pay over the odds for a leader, theyll get someone really good, while if they pay an average rate, theyll get someone mediocre. If this premise has truly changed, theres real reason to believe executive pay inflation in the UK has had its day. In any case, it seems clear that executive pay is undergoing something of a paradigm shift, although its still early days. We need to wait to see if investor activism on executive pay will outlast the pandemic; if interest wanes, we might see a return to the era of excessive executive pay that Peter Mandelson so memorably heralded. In any case, he would probably say something very different about top pay these days.