AIA is publishing a series of articles designed to take a quick look at key topics in accountancy, management and finance. Bookmark this page to update your knowledge when you can grab a spare five minutes. If you would like to suggest subjects for future articles, please contact us.
A QUICK LOOK AT…
Governance is about how management are held to account for the decisions they make. There are various parts to governance. One of the most important is remuneration. Good governance requires that CEOs, and other senior executives, are paid in relation to company performance. With the average level of CEO remuneration similar to Premier League footballers, the assumption is that CEOs’ performance is what might be referred to as ‘Rooneyesque’.
A study by researchers at Lancaster University into the remuneration of CEOs for FTSE350 companies is revealing. CEO total remuneration in all forms rose by 82% in real terms between 2003 – 2014, but they found little correlation between these rises and company performance. The issues are complex, involving how performance is measured, how failure is dealt with, and the way remuneration is much more connected to firm size, industry type and remuneration levels the previous year. However measured, the results did cast doubt on whether CEO remuneration on average is connected to company performance.
Other models of CEO remuneration are based on agreed multiples of employees’ average pay. The idea is that the performance of a company reflects the combined efforts of all those working there, not just the CEO. Any significant pay rise for the CEO as a result of good performance of the company should, using the multiples approach, be shared by a similar percentage rise for all employees. John Lewis uses this approach. John Lewis’ Chairman’s total salary is currently 60 times the average of all employees and he will in future get the same pay rise as all employees. The High Pay Centre estimates that in FTSE100 companies the multiple is now 130 on average.
The debate about the pay of CEOs in relation to performance will no doubt continue for years to come.