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Are they worth it? We don't think so!

Iain Henderson

Faculty Blog

On Thursday 14 April The Guardian reported that “Britain’s top bosses were sent a warning on Thursday that they must rein in boardroom excess when shareholders voted overwhelmingly against huge pay deals at two of Britain’s biggest companies”.

60% of shareholders voted against a £14m pay package for the chief executive of BP, Bob Dudley, and similar (although somewhat less generous) rewards for other board members. Perhaps shareholders were a little piqued that these supposedly performance-related rewards were for a year when the company ran up losses of $6.5bn following a collapse in oil prices and large fines for the 2011 Deepwater Horizon accident.

One shareholder, the Church of England pension board, questioned “whether this level [of pay] is morally right” and went on to ask how much one individual executive needed to be incentivised to make him work.

However Ann Dowling, the chair of BP’s remuneration committee, defended the level of pay at BP, saying it was “somewhere in the middle” of what other companies of a similar nature paid. “We have to reward people appropriately to attract the talented employees who are important for the future health of the company,” she said.

The Guardian went on report that a number of politicians and commentators including Vince Cable, the former business secretary, and Barry Sheerman, the Labour MP for Huddersfield, believed Dudley, Dowling or others should lose their jobs over the ‘fiasco’.

What about the Workers?

The UK Chartered Institute of Personnel and Development (CIPD) recently published the results of a survey they commissioned to examine employees’ views on executive pay (The View from Below: What Employees Really Think About Their CEO’s Pay Packet, December 2015, CIPD).

On the CIPD’s behalf, YouGov conducted an online survey with a total sample size of 1,030 working adults. The figures were weighted to be representative of the UK workforce in relation to sector and size (private, public, voluntary), industry type and full-time/part-time working by gender.

The survey found:

  • Nearly half of employees (44%) felt their CEO’s pay was either far too high or too high.
  • 38% of employees thought their CEO was not rewarded in line with the level of the organisation’s performance, compared with 32% who said that they were.
  • When considering CEO and employee pay ratios, around a third (34%) thought their CEO’s pay should be less than five times an average employee’s salary; around a fifth (22%) believed it should be five times and above; 18% said ten times and above.
  • Seventy-two per cent of employees would like to see more pay transparency within their organisations.
  • 71% agreed that CEO pay levels in the UK were generally too high (while only 5% disagreed).
  • 54% agreed that CEO pay levels in the UK were bad for an organisation’s reputation (while only 11% disagreed).

So the rewards for CEOs in the UK don't seem to be popular with either shareholders or employees.

Principal-Agent Problem?

Economists have warned us about what they call the principal–agent problem.  The owners of a firm like BP (the ‘principals’) employ directors and other senior managers (the agents) to run the company for them and in theory the agents should of course run the firm in the best interests of the principals.  But it might be difficult for the principals to make sure the agents are actually doing this rather than running it for their own benefit e.g. by awarding themselves enormous, unjustified pay awards.

Does the UK have a significant principal–agent problem in terms of executive pay?