Business Regulation » Top CEOs earn more in 33 hours than UK worker’s typical annual salary

Top CEOs earn more in 33 hours than UK worker’s typical annual salary

The average FTSE 100 CEO earns 117 times more than the average UK worker. The CIPD has said that incorrect assumptions about what drives, incentivises and governs sustainable business performance are to blame.

The average pay for UK FTSE 100 CEOs in 2020 means that they earn more in 33 hours than the typical worker’s annual salary, according to the High Pay Centre, an independent UK think tank.

High Pay Centre monitors pay at the top of the income distribution, and has said that FTSE 100 CEOs only need to work until just before 5pm on Monday 6 January 2020 in order to make the same amount of money as a typical full-time employee does in a year in the UK.

The research undertaken by High Pay Centre in collaboration with the Chartered Institute of Personnel and Development (CIPD) found that:

  • Top bosses earn 117 times the annual pay of the average worker
  • In 2018 (latest available data) the average FTSE 100 CEO earned £3.46 million, equivalent to £901.30 an hour
  • In comparison, the average (as defined by the median) full-time worker took home an annual salary of £29,559 in 2018, equivalent to £14.37 an hour
  • To match average worker pay in 2020, FTSE 100 CEOs starting work on Thursday 2 January 2020 only need to work until just before 17.00 on Monday 6 January – just three working days (33 hours).

Incorrect assumptions driving wage gap

The CIPD has said that there are many factors that are causing the gap in wages, and they all stem from incorrect assumptions about what drives, incentivises and governs sustainable business performance.

The organisation has urged all Remuneration Committees (RemCos), investors and HR teams to consider whether long-term incentive plans (LTIPs) really work, whether a firm’s RemCo is fulfilling its duty to oversee fair pay and whether CEOs are really the lynchpin of organisational success?

LTIPS are designed to incentivise executives to act in the long-term interests of an organisation, and typically make up around half of a CEO’s pay at the UK’s largest businesses. However, in practice, most LTIPs cover a 3 to 5-year period.

The CIDP also question the effectiveness of RemCos. The UK’s Corporate Governance Code stipulates that boards create a culture that aligns with company strategy, and to assess how they preserve value over the long-term.

It also explicitly requires RemCos to review pay across the wider workforce, and explain how such policies are appropriate when setting executive pay. The CIPD has highlighted research that suggests that RemCos are ill-equipped to fulfil this role.

When it comes to the value that CEOs offer and the way such high pay is justified, the contribution they make to a company’s share price is often cited. The fear is that when they leave a company’s share price can drop, and therefore paying a higher wage will keep them in place.

The CIDP has asked organisations to ensure they truly understand what drives success in their organisations, and how much top executive contribute to this.

The CIPD has outlined three key changes it wants to see to achieve its ultimate goal of establishing a greater appreciation and understanding of why people matter and are worthy of greater investment. It says in order to achieve this, organisations should:

  • Encourage more transparent corporate reporting on pay and performance throughout organisations, particularly among ‘key management personnel’ and the top 1% of earners
  • Simplify CEO pay packages and put more emphasis on non-financial measures of performance to incentivise behaviours that benefit all of a company’s stakeholders
  • Encourage company boards to reform the way in which pay and performance is governed by replacing their RemCos with People and Culture Committees.

Greater transparency

2020 is the first year that publicly listed firms with more than 250 UK employees will have to disclose the difference between their CEO pay and their average member of staff.

Peter Cheese, Chief Executive at the CIPD, said: “This is the first year where businesses are really being held to account on executive pay. Pay ratio reporting will rightly increase scrutiny on pay and reward practices, but reporting the numbers is just the start.

“We need businesses to step up and justify very high levels of pay for top executives, particularly in relation to how the rest of the workforce is being rewarded.”

Firms will also be required to provide a supporting narrative to explain the reason behind the difference in pay. We will begin to see this in reports published in 2020.

While the figures may seem alarming, compared with last year FTSE 100 CEOs are earning less than they were a year ago, with their average pay falling from £3.9 million. This means they have to work slightly longer into the year than they did last year to earn the average UK yearly salary, but only a matter of hours.

The High Pay Centre has used its findings to call on UK businesses to consider this inequality between wages, which makes the UK one of the most unequal countries in the developed world.

Luke Hildyard, director of the High Pay Centre, said: “CEOs are paid extraordinarily highly compared to the wider workforce, helping to make the UK one of the most unequal countries in Europe.”

Both the High Pay Centre and the CIPD have urged businesses to not treat the new reporting requirements as a simple box ticking exercise, but to take the opportunity to folly explain and consider their executive pay levels.

Speaking on the findings, Business secretary Andrea Leadsom said: “Today’s figures will be eye-watering for the vast majority of hard-working people across the UK.

“The numbers are better than they were – down a quarter since 2012 and 13% on average since last year – but the situation is still concerning, especially in those cases where executives have been rewarded despite failing their employees and customers.”

She said that the changes to reporting would “increase transparency around how directors meet their responsibilities”.

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