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May 23, 2022

Think tank urges making investor votes on CEO pay legally binding

Next investors back 100 percent CEO bonus as pay ratio gulf widens

Shareholder votes on directors’ remuneration reports should be legally binding, an economic inequality think tank recommends, as it finds pay gaps are not only rebounding but also widening post-pandemic.

Cuts to executive pay during the health crisis led to a drop in the average CEO-to-employee pay ratio across the FTSE 350 to 44:1 in 2020-2021, down from 53:1 in 2019-2020, according to new research by the London-based High Pay Centre (HPC) today. The median gap between CEOs and their lower-quarter employees fell to 59:1 from 71:1 in 2019-2020.

But scrutiny by the independent, non-partisan body of disclosures in the first three months of this year indicate pay gaps will widen again in 2022. ‘Across the 69 companies that disclosed pay ratios in Q1 2022, the median CEO/median employee ratio was 63:1. This is nearly double the ratio for the same group of companies in 2021, at 34:1,’ the HPC says.

The research finds pay ratios are widest in the retail industry, with a remarkable average pay ratio of 117:1. Ratios are lowest in the media (29:1) and financial services (30:1).

HPC says companies should directly provide information on pay ratios to their workers. It recommends that companies include guidance on potential future pay ratio sizes in their remuneration policies so shareholders can vote on it.

Earlier this month, opinion polling by HPC found strong levels of public disapproval for CEO-worker pay gaps at a time of soaring living costs. Survey participants were asked what CEOs of the UK’s biggest companies should be paid compared with their middle and low-earning employees. Sixty-two percent said no more than 10 times would be appropriate. Just 3 percent said more than 50 times.

Bonus rubber-stamped

Despite media predictions of an investor backlash, at its annual meeting last Thursday an overwhelming 92 percent of shareholders voted to support the renumeration report of the £8 bn ($10 bn) clothing retailer Next. The FTSE 100 company rewarded its CEO, Simon Wolfson, with almost £4.4 mn last year, up 50 percent on the year before, after being handed an annual bonus worth 100 percent of his basic salary.

The Institutional Voting Information Service (IVIS) approved Next’s renumeration report before the retailer’s annual meeting was held. While noting the company’s financial performance and overall circumstances, the service warned ‘shareholders will need to be satisfied that the payment of bonuses was appropriate in a year when the company again participated in the government’s Coronavirus Job Retention Scheme and there is no clear indication whether the company has or intends to repay the support received from the government.’

Simon Wolfson, Next

IVIS added that in July 2021, Next decided voluntarily to repay the business rates relief received for the period the company’s stores were open in the year. Next did not respond to an invitation to comment on IVIS’ remarks.

IR practitioners tell IR Magazine they have experienced a surge in the level of investor interest in executive pay over the past five years, especially in Europe. According to the new Executive Compensation report, almost six in 10 European IROs say they have received more queries from investors in the past five years, compared with four in 10 North American IROs and 36 percent in Asia.

But only three in 10 boards worldwide have changed the way they approach executive compensation post-pandemic, the Executive Compensation report adds: ‘North American boards are the least likely to have changed the compensation approach in the wake of Covid-19. Asian boards are the most likely to have made long-term changes to performance-based pay, while Europeans are most likely to have made short-term changes.’

James Beech

James Beech joined IR Media Group as editor-in-chief of IR Magazine and Corporate Secretary in January 2022. He was a multimedia journalist, editor, client relationship manager, awards host and public speaker at Campden Wealth, for and about the...