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Attracting and retaining the most talented people to work for a business is key to its ongoing success. McKinsey & Company coined the phrase ‘the war for talent’ back in 1997. Its relevancy today has arguably increased due to the accelerating pace of globalisation over the last 20 years. This applies everywhere, from recruiting top graduates to hiring the best people to lead the business.
Attracting talented CEOs to join is particularly challenging. To set the strategy of a FTSE 350 firm could in practice be the difference in billions of pounds to a company’s valuation. After it was announced that Angela Ahrendts, then CEO of Burberry, was leaving the company for a role at Apple – Burberry’s stock market value immediately fell by half a billion pounds. To the market, Angela appeared to be providing a lot more value than her received £17 million pay package at Burberry. If the average graduate salary is £20,000, a CEO on £17 million would have been paid 850 times more. This is due to the distinction in talent. There are many fantastic graduates, but how many people are capable of successfully running a multibillion pound multinational business in a hyper-competitive sector? Investors can rest peacefully in the knowledge that had you or I left a firm after completing its graduate scheme, such a change in value is highly unlikely to arise.
The problem occurs when CEO pay does not match company performance. Angela was widely viewed as being behind Burberry’s successful strategic shift into a global luxury brand. However, there are a number of cases where performance and payment are at a mismatch. Shareholder discontent has been rife. In 2016, two FTSE 100 companies had their remuneration reports (i.e. executive pay plans) voted down with other firms on the receiving end of investor’s openly voicing disapproval. The Investment Association, an entity representing the UK’s £5.5 trillion asset management industry, published a report last year stating that rising levels of executive pay over the last 15 years has not been aligned with the FTSE 100 performance. According to the report, executive pay in its current form is failing to act as the tool to incentivise performance.
The High Pay Centre, a think tank set-up to monitor income disparity, calculated the average pay ratio between FTSE 100 CEOs and the average total pay of their employees in 2015 was 129:1. It assumed, the average annual pay of their employees was £28,200. Yet there are many people in the UK, who earn much less. So if performance has been patchy at best, why did CEO pay increase by 10% in 2015? In comparison, according to the Office of National Statistics, the average worker saw real wages grow by less than 2%. That wage increase was the highest received since 2008. The income disparity in the US is even more pronounced. The S&P500 CEO to average worker pay ratio is approximately 335:1.
By all means, we should compensate quality people for the positive impact they deliver. But there is a growing sense of injustice that the opaque nature of executive pay rises is not deserved. Is it right that the CEO of BP total pay package rose 20% in 2015, in a year when the company reported record losses? Reform of executive compensation is key, but few are brave enough to take the first step. No one wants to lose the war for talent after all.
By Nabeel Alhassan