According to new research from the Centre for Economic Performance, LSE, there is a clear link between corporate success and senior executives’ pay. However, the LSE, which analyses data on firms making up 90% of the value of the UK stock market, there is also evidence of an impact of corporate failure on CEOs’ remuneration; the link between pay and performance is extremely tenuous.
Recent figures indicate a resurgence in the growth of CEO pay in the UK at a time of
austerity for most. Anger at these numbers is driven in part by a growing belief that such pay
bears little relationship to how the companies that these CEOs manage actually perform. In
other words, the argument goes, there is pay for no performance.
Dr Brian Bell and Professor John Van Reenen have created a new database of pay for CEOs,
senior executives and workers covering over 400 firms since 2001 and this is the first time that data covering everyone from the CEO to a cleaner in a large sample of firms have been collected in this country. It allows for a rigorous exploration of how pay across a company changes as the performance of the company varies.
The research finds that: There are big differences in average pay. CEOs earn around 40 times more than the average worker – but this multiple rises to around 80 looking only at the very top
companies – the FTSE 100.
The majority of pay for CEOs comes from bonuses and stock incentive plans, whereas
95% of workers’ pay comes from basic salary. When a firm’s performance improves, so does pay, but it goes up much more for CEOs than for ordinary workers. If the firm’s value increases by 10%, CEOs on average get an extra 3% in pay, while workers get only 0.2% more.
This close pay-for-performance link among CEOs is a recent development. Evidence
from the 1980s and early 1990s found almost no link between pay and performance
for executives. The link is driven by bonuses and incentive packages, which have
become more important in recent years.
John Van Reenen says:
“Our evidence shows a strong link between CEO pay and company performance. It’s
not just upside because when the firm does badly, CEO pay also goes down.” So that’s alright then.