It seems the UK financial and corporate establishment is agreed. The London stock market is in a funk, with too many companies hopping off to re-list in New York. Therefore the UK executive class must be given US-style pay packages to keep ‘em loyal.
That’s a slight exaggeration since, so far, it’s only a handful of companies – the likes of AstraZeneca, HSBC, LSEG (the owner of the London Stock Exchange) and the medical devices group Smith & Nephew – that have revealed, or signalled, that they want to boost executive rewards to keep up with US rivals. And none of them have threatened to quit London. All the same, it’s remarkable that an intense debate about the woes of the London stock market has morphed into a refrain about executive pay in the UK.
For the past year, we were told that the lack of buzz in London was caused by the decline of UK pension funds as core owners of the market, or perhaps by stamp duty, or perhaps by the fragmentation of local authority schemes. Now, just as pay season approaches, there’s a new culprit: the perception that chief executives of FTSE 100 firms aren’t paid enough.
At LSEG, its chief executive, David Schwimmer, could be looking at a rise from £6.25m to £11m in his potential pay, and he should probably give thanks to the head of the actual London Stock Exchange, a small part of the overall global group these days, for preparing the pitch. It was as recently as last May that Julia Hoggett, the LSE CEO, called for a “big tent” conversation about boardroom pay in the UK versus the US, and she has definitely succeeded in shifting consensus opinion.
Big fund management houses, such as Legal & General Investment Management, are talking approvingly about giving companies “necessary flexibility” on pay. In the same spirit, the Investment Association, the trade body for UK asset managers, wrote to remuneration committees last week to repeat its usual arguments about aligning pay to performance but also to add a significant line about ensuring that “the UK is a competitive place to list and remain listed as well as do business”. Translation: if you make a case for higher executive pay, especially if you’re up against US competitors, we will listen.
It was only three years ago that 40% of shareholder votes at AstraZeneca were cast against proposals to award larger potential bonuses to the chief executive, Pascal Soriot, even though the company was already a UK corporate star. This year’s proposal is to go further. The company’s modelling shows that Soriot’s “maximum” annual rewards could rise to £18.9m but the actual value, once a rise in the share price is factored in (because most of the bonus comes via shares), could be £25.2m. The current pay policy, said the remuneration chair, Sheri McCoy, “does not provide sufficient headroom to deploy appropriately leveraged pay for performance compensation across our most senior leadership roles”. Prepare for more in that vein from others.
Some UK companies, we should probably concede, will be making factually accurate comparisons. UK executives are not underpaid versus peers in the rest of Europe, but boardroom pay in the US is an entirely different league. Soriot has received between £10m and £17m every year since 2016, but many less successful counterparts at US pharma firms will have had substantially fatter wedges. And the same is probably true lower down the company.
But it’s not hard to sense where this script could go. About 75% of the earnings of FTSE 100 firms are made outside the UK, with the US obviously being the biggest source. So the list of companies that could consider themselves to be “exceptions” to UK executive pay norms may turn out to be long. Once the door is ajar, everyone will want to rush through.
Since it is almost impossible from outside to tell precisely which pleas of competitive pressures from the US are genuine and which are simply self-serving grabs, the ratchet game will begin. A new US benchmark is being quietly legitimised. One doubts the London stock market will be saved in the process.
