One of the largest UK pension and insurance firms has opened the door to backing US-style mega-bonuses for London listed companies despite fears that executive pay is fuelling inequality and encouraging “short-term risk taking”.
Legal & General Investment Management has updated its pay policy to say there is room for the “necessary flexibility” needed to attract the best talent. It acknowledges “an increased push” by UK companies towards “remunerations structures that are more closely aligned to US-style pay”.
It says the approach may be important at companies with US-based leaders, or those competing for talent in that market.
The top executives of London-listed companies tend to be offered shares in one incentive scheme at a time. Share handouts are also often parcelled up into portions over a period of years so that executives may have left the business by the time they receive the big sums.
But L&G has revised its guidelines in an update published on its website this weekend and first reported by the Sunday Times. They say it will support bonus schemes linked to a company’s share price performance over a period of time – a structure that has resulted in much higher bonuses in the US.
Median pay for the bosses of America’s 500 largest quoted companies was $14.5m (£11.4m) in 2022, according to research by the Wall Street Journal. Stephen Schwarzman, head of the private equity group Blackstone, topped the pay league at $253m, with the leaders of Alphabet, Hertz, Peloton and Pinterest among nine chief executives who collected more than $100m.
Research by the consultancy Willis Towers Watson suggests that while basic salaries for executives in the US, Britain, France and Germany are broadly similar, at about $1.3m on average, US business leaders can expect to receive $9.5m a year in long-term bonuses, compared with $2.6m in the UK.
There have been concerns that UK companies are struggling to recruit top executives in the global market because sought-after individuals can earn much higher pay in the US thanks to investors supporting a wider variety of share-based payouts.
The tighter rules insisted on by the big UK investors are being blamed for putting off companies from listing in London. The London Stock Exchange recently lost out on the $54.5bn listing of Cambridge-based silicon chip maker Arm Holdings. Last week, a leading investor in Pearson called for the FTSE 100 publisher to shift its listing to the US. Andy Bird quit Pearson as chief executive in September after repeated rows between the company and its investors over his pay.
In 2019, the turnaround superstar Namal Nawana quit as chief executive of the medical technology company Smith & Nephew after just 18 months, again over pay. The $6m (£4.7m) a year he stood to make if all targets were met fell more than $2m short of the package at his previous job at US diagnostics company Alere.
However, UK companies are competing successfully for European talent. The FTSE 100 retailer JD Sports was able to hire France’s Régis Schultz, a former boss of Monoprix, while its fellow retail group Kingfisher, the owner of B&Q, attracted another French national, the former Carrefour executive Thierry Garnier.
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L&G says it will back US-style schemes if a company can provide “acceptable justification” on how such a pay structure is aligned to its “strategy and business cycles” and meets other criteria such as whether the renumeration packages are “fair and appropriate” in the light of the entire workforce’s pay.
Meanwhile, research by the High Pay Centre thinktank found median pay for FTSE 100 chief executives was on average 80 times that of an ordinary employee.
Luke Hildyard, the director of the High Pay Centre, said: “We need a fairer, more equal, more inclusive economy where companies create lots of well-paid jobs for all their workers, rather than a handful of obscenely paid roles for those at the top.”
Paul Nowak, the general secretary of the Trades Union Congress, said: “Workers deserve a fairer share of the wealth they create. Too many firms are guilty of feather-bedding those at the top at the expense of the wider workforce.”
