Theresa May Asks: How Much Is that CEO in the Window
(Bloomberg Gadfly) -- British bosses are clamoring for Theresa May to come up with a strategy for Brexit. Instead, they've got more regulation around executive pay.
It is easy to suggest that May has better things to do. What's more, her plan, as reported by the Financial Times, amounts to little more than underlining and printing in bold details about pay that companies already disclose. Still, highlighter pens exist for a reason.
May wants companies to disclose the ratio of the CEO's pay to that of the average British worker, according to the FT. The boss's reference number will be his or her "single total" value received -- a measure including base salary, bonuses, benefits and pension.
Detractors say this ratio is already calculable from the annual report. That's not entirely true. Companies disclose total staff costs, but the actual value received by employees can be ambiguous. In addition, the number given for total headcount may include part-time, temporary and overseas employees.
The other criticism is that multiples will be highly variable and hard to interpret: how can you compare retailers with investment banks?
Just look at the three U.K. companies that experienced steep declines in their share prices this week:
- Former Provident Financial Plc CEO Peter Crook's 6.3 million pounds of total pay last year was between 132 and 154 times the company average, depending on how you slice the numbers.
- WPP Plc's Martin Sorrell received 48 million pounds -- 1,075 times the ad group's average. That falls to 147 times if you strip out the 42 million pounds Sorrell received through a long-term incentive plan.
- Dixons Carphone Plc's Sebastian James received 1.8 million pounds -- roughly 80 times the average, although that figure is distorted by the retailer's large number of part-time employees.
But comparisons over time for the same company will be meaningful. That's also true for the differences between companies in the same industry. If one CEO is paid a vastly higher multiple of the average wage than his or her immediate peers, shareholders need to know why.
Meanwhile, a trade group representing U.K. money managers is preparing a list of companies that have suffered shareholder revolts over pay, according to Sky News. Again, that doesn't add much to disclosure. But it will focus minds. Who would want to be on the naughty list?
May has come up with some useful policy which costs nothing to implement and will force more accountability around high pay. This matters because CEOs shouldn't be viewed like the well-paid stars of entertainment or sport. The success of a company is hardly ever the function of one individual, but stems from competitive advantages enjoyed through technology, luck or brands and relationships built up over years by previous staff and managers.
Fostering the myth that it's all about the CEO, rather than the board and broader team, is a recipe for burnout and poor decision-making. If May's plan chips away at that, investors should welcome it heartily.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Chris Hughes is a Bloomberg Gadfly columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.