Yesterday Vince Cable spoke stridently on executive remuneration practices in the UK – highlighting a need to attract top talent to British FTSE 100 boards and striking a chord with public opinion on the need to link pay and performance. Here Albert Ellis, CEO of head hunting agency Harvey Nash, gives an enlivening response with thought for UK SMEs and the bigger economic needs of the nation.
The Business Secretary relishes the loyal tribal jirga which is the annual Lib Dem party conference.
Yesterday he was on fine form as he told the faithful and the country, we were at war economically and vowed to tackle the “escalation of executive pay”. He also brought some rather grey thoughts on responsible capitalism and social justice.
Whilst the Business Secretary would make an excellent CFO or non executive director, I would hesitate to recommend him as equipped for the job of sales director. I can only imagine what British manufacturer Jaguar thinks; they are more anxious to see the red tape slashed on exporting high margin amour-plated XJ Sentinels so they can enter a lucrative new market, than listen to an economics lecture with an unhappy ending.
Nevertheless the speech played well with the media and it is a subject clearly high in the minds of the public. Everybody appears to agree: executives should be rewarded and penalised based on performance, and that payment for failure is totally unacceptable.
Well, I too agree. And would like nothing more than to see greater debate and disclosure around executive pay. But I also recommend caution.
The political class have been quick to capitalise on the lack of a link between share price and executive compensation. Indeed many recent reports on executive pay have seemingly also backed this up. But while searching for a story there is a risk we are not taking into account the full picture.
Firstly, a recent study Harvey Nash conducted with London Business School’s MBA Consulting Team revealed a surprising number of CEOs are, in fact, remunerated on company performance. You just need to look beyond the short term, year on year, stats. For example in the case of FTSE 100 CEOs, those who had served continuously in the lead up to, and through the financial crisis, showed a very strong (30%) correlation between remuneration and share price over a five year period. In short, keeping your CEO creates value. Similarly retail and consumer organisations showed a strong correlation. Smaller companies too.
Secondly, to simply look at CEO pay in UK companies in isolation misses a much wider understanding of the unique position in the UK. The top 100 companies listed on the London Stock Exchange are not representative of British business in general. Increasingly London has become one of the most successful capital markets for large global companies, many of whom employ CEOs, executives and non executive directors from all over the world.
It stands to reason that in seeking to attract the very best talent available anywhere in the world to run some of the world’s largest and strategically most important companies to the global economy, boards must offer compensation packages with international purchasing power in either US Dollars or Euros.
In addition they must compete with the US, Europe and increasingly now Asia on attractive long term incentive packages. Even ‘British’ FTSE 100 companies BP, Vodaphone Marks & Spencer and Lloyds Banking Group all employ CEOs who are not British born nationals, neither do they live in the UK full time.
When it comes to pay, the distinction between FTSE 100 and small to medium sized British business is also clear. British SME’s are more likely to align their CEO pay with performance even while battling extremely challenging market conditions in their home market. Findings taken from the Manifest/MM&K Director Remuneration Survey 2011 show that total remuneration in smaller companies has not grown as fast as in the largest companies.
As the UK’s largest publicly quoted head hunter we have worked with our clients throughout the downturn, advising them on board and executive appointments, their remuneration and long term incentives. Our experience is that non executive directors are very sensitive to the issues around executive pay and the vast majority particularly in the SME sector have exercised restraint during the financial crisis.
However, let’s not lose sight of the greatest challenge facing FTSE 100 boards which is to attract and retain talented CEOs who have the experience to successfully grow our companies and provide an important solution to the increasing unemployment problem.
So finally, perhaps it’s time for the Business Secretary to calm the rhetoric on FTSE 100 executive pay and direct the Coalition’s resources on getting the real economy moving. Given that all the evidence is that new jobs are created mainly by small to medium sized companies, I call upon the government to focus on measures which stimulate economic growth.
To view more information from Harvey Nash / London Business School’s MBA Consulting Team study on Executive Pay please click here:
