Just how much should a corporate executive be paid in salary and bonuses? It’s a question that’s been asked for decades, coming more and more into focus since the global financial crash in late 2008.
On January 4th this year, the “Fat Cat Wednesday” campaign in the UK spent the day highlighting disparities in income and wealth. According to the High Pay Centre, an independent think tank, it was a day on which FTSE 100 chief executives earned the average annual salary of a UK worker.
According to an analysis by the Equality Trust, a FTSE 100 chief executive is paid 172 times more than a nurse, 145 times more than a teacher and 401 times more than a minimum-wage worker receives in a year.
Sir Martin Sorrell, the longstanding chief executive of advertising company WPP, received £70 million (€82 million) in cash and shares in 2015, making his pay deal one of the biggest in UK corporate history.
From January 1st, public companies in the US have been required to disclose the ratio of the chief executive’s annual total compensation to the median annual total compensation of all other employees. This is designed to help inform shareholders when voting on so-called “say-on-pay” resolutions at annual meetings.
Multimillion chief executive salaries are not unusual in the US, but investors are beginning to agitate for lower rewards. Coca-Cola reduced the remuneration of its global chief executive, Muhtar Kent, by 42 per cent in 2015, as part of a promise to reduce executive compensation.
On Monday, my colleague Joe Brennan highlighted the fact that an influential proxy advisory firm, Institutional Shareholder Services, had recommended that shareholders of Irish food company Greencore should reject the terms of an improved remuneration package for chief executive Patrick Coveney at its annual general meeting on January 31st.
Greencore last month revealed its intention to double the amount that can be granted to Coveney under a so-called performance share plan, to 200 per cent of his salary. It’s a potentially lucrative deal for Coveney, although the kicker is that he now has to wait five years for a payout, as opposed to a shorter previous timeframe. Coveney, whose brother Simon is Ireland’s Minister for Housing, received a package amounting to €2.5 million last year.
Is he worth it? Greencore’s board believes so, and the decision on its incentive package was made after consulting with the company’s 15 biggest shareholders.
There is no doubt that Greencore has been transformed on his watch, its acquisition last year of Peacock Foods in the US being the latest stepchange in this process.
The best-paid chief executive at an Irish listed company is Albert Manifold at CRH. Last year the company was forced to defend his remuneration after 40 per cent of shareholders voted against a plan that could earn him an annual bonus of more than €8 million.
Executive pay is a political hot potato in Ireland following the crash in late 2008. This is particularly so in banking, given that taxpayers had to bail out the domestic banks to the tune of €64 billion.
There was widespread anger among the public at the generous pay and bonuses earned by bank executives in the years before the crash, which heavily informed the government decision to introduce a €500,000 salary cap for executives that had received State funds.
The Government is widely expected to offer 25 per cent of AIB shares to institutional investors in a stock market flotation in Dublin and London this year. As sure as eggs are eggs, the issue of bonuses and long-term incentive payments for AIB executives will arise.
A number of senior people, both in banking and the markets, have suggested to me that investors will push for some form of incentive package for AIB executives, to align their interests with those of shareholders, or they will want some transparency on when this might be introduced after an initial public offering (IPO).
Minister for Finance Michael Noonan is likely to resist this when it comes to the IPO, but the Government's position could change down the line.
The narrative around the salary cap for senior bank executives is that €500,000 is too low compared with their peers in other countries, and with what some executives earn in IFSC companies here.
In 2015, AIB's then chief executive, David Duffy, was poached by Clydesdale Bank, a small player in the UK market, which is paying him a multiple of his salary here. Duffy said his move was about the challenge rather than the money, and he has certainly made the most of the opportunity afforded to him.
But AIB has also continued to flourish under the guidance of Bernard Byrne, who stepped up from his previous role as director of retail and business banking and is paid a salary of €500,000. So maybe that narrative doesn't hold water.
And it's not all a one-way street on executive pay. Kevin Toland took a substantial pay cut when he left a top job with Glanbia in the US to become chief executive of the DAA in 2013.
In an interview with The Irish Times last year, Coillte chief executive Fergal Leamy spoke about the reasons why he left a lucrative position at global private equity firm Terra Firma for his €191,000-a-year role with the State forestry group.
“I had been fortunate enough in the previous few years [before he took the Coillte job], whereby finance didn’t need to be the key motivator here,” he said. “As a family, we had been travelling for 15 years. We wanted to move back to Ireland.”
Given the disparities in the size of various markets, and the differences in the scale and complexity of companies operating in diverse sectors, there’s no one-size-fits-all solution to the issue of executive pay.
The rules of the game are changing, with more disclosures and remuneration clawbacks now in place. The calls for greater transparency about pay, and more accountability, will only grow louder in the coming years.
Shareholders are increasingly feeling empowered and the question of how much is too much will progressively be answered by them.