Executive pay: are we paying ourselves what we’re worth?

1 November 2017

A recent BBC radio interview with the vice-chancellor of Oxford University prompted a few thoughts on remuneration for executives. The background was the Government’s open criticism of the rates of pay of various university vice-chancellors at a time when the Opposition has focussed attention on student debt. The interviewer sought to embarrass the vice-chancellor over her “excessive pay” (£420,000 plus pension contributions). Intellectually, however, the contest was unequal; the interviewer failed to land any blows and the vice-chancellor of the world’s number one university[i] emerged unscathed and unbowed. As you will have heard, the Prime Minister has also pointed her finger at the so-called fat cats of big business and has threatened to make shareholder votes against executive remuneration binding on companies. Although there have recently been a number of shareholder revolts they have had little effect on companies’ remuneration committees.

We were reminded of a number of cases we have dealt with in which directors’ pay has played a significant part. There was the couple whose small engineering business failed to generate the income that their lifestyle aspirations required, who were horrified when we had to tell them that they could not afford the large Mercedes in which they drove their children to school, nor the huge house for which they had placed a bid. At the other end of the spectrum we advised two women who ran a very successful media company which had accumulated a vast war chest of cash (for which the business had no foreseeable need), whilst paying themselves little more than a subsistence wage. We are pleased to report that in the case of the engineering company, after many trials, tribulations and a creditors’ voluntary arrangement, persistence and tenacity paid off, the business grew and the couple now live in a country house with a garage full of cars. The two women were eventually persuaded to pay themselves at least up to the 40% tax threshold and to contribute to a company pension scheme.

Of course, the remuneration packages of these SME entrepreneurs pale into insignificance beside the successful few who head up our FTSE 100 companies. In 2016 their average pay was £4.5m (much of it taken as shares or share options). The highest paid was Martin Sorrell of WPP Plc, the marketing, PR and data management giant. He received pay and benefits totalling £48.1m. But let us just consider his responsibilities and achievements. WPP’s share price has increased by 73% in 5 years and its market capitalisation is £17.21 billion. It has a turnover of £15.26 billion. Last year’s pre-tax, pre-interest earnings were £2.1 billion. When the BBC sought also to shame Mr. Sorrell about his pay he said: “I’m not embarrassed about the growth of the company – from two people in one room in Lincoln’s Inn Fields in 1985 to 190,000 people in 112 countries and a leadership position in our industry, which I think is important.”

I think what we are witnessing is the clash of populism with market forces. The Government needs to show that it is on the side of the average voter, who earns just £27,000 a year, but it would be ill-advised to seek to constrain the market forces that ultimately determine the pay of university vice-chancellors (on average £277,834 pa) and of our most successful captains of industry. To do so would be to risk losing our brightest industrial and academic brains to overseas competition. Unsurprisingly we have heard no criticism from the PM of the rates of pay of footballers and their managers, and when did BBC Radio 4 ever challenge Wayne Rooney to appear on their programme and justify his £17,452,200 annual pay cheque? On the football pitch it seems that populism and market forces coincide.

So, if you own a small or medium-sized enterprise how much should you pay yourself? The answer is again down to market forces. To be blunt, if your business can’t afford to pay you what you are worth, then changes need to be made. On the other hand, if your business is very successful and you are underpaying yourself, then taking some business advice may be worthwhile. We at UHY are here to advise, encourage and support you. Above all we want you to have a successful, prosperous business. We are always ready to discuss and evaluate your business ambitions and to add our own suggestions.  Please get in touch if you think we can help.

pay

[i] The Times Higher Education World University Rankings 2016-2017