CEOs earn €3m a year but there is reluctance to lift minimum pay

It seems that nobody is satisfied with their income. At every level there appears to be an upward pressure on salaries and wages, some more deserved than others. The substantial remuneration packages of CEOs has got recent media attention while, at the other end of the pay scale, there has been debate about the sustainability of increasing minimum pay.

The top-10 most highly rewarded CEOs in Irish public companies earn an average of €2.9 million a year. In the UK FTSE 100 the average CEO income has reached €5.5 million a year, while the top-10 quoted US company CEOs earned an extraordinary average $70 million a year.

Such levels of pay, sometimes even higher than the seemingly astonishing incomes of top premier league soccer players, have been questioned.

At the same time, there have been calls in the past week for restraint in increasing the minimum wage from €9.15 an hour (about €17,600 a year). It is feared that the impact of Brexit will make Irish firms less competitive and a 10 cent increase in the minimum wage (recommended by the Low Pay Commission) coupled with its upward pressure on other low/middle income pay could push many firms out of business.

Last week self-employed couriers protested outside the London offices of so-called “unicorn” technology food business Deliveroo, in reaction to a request (as part of cuts) to accept revised contracts including a fee per delivery instead of the guaranteed hourly rate. The gaps continue to widen.

Perceived inequalities in pay can be damaging. Excessive CEO remuneration has been shown in US studies to unnecessarily drive up average pay in middle-management ranks, and dramatic differences between levels throughout a business can undermine motivation. In a wider social sense, perceived inequalities between groups leads to huge discontent and instability.

There is concern that the gap between CEO pay and the average income in their own firms is widening to a worrying level. CEOs currently earn 80/90 times the average wage in Irish public companies. In the UK the “CEO to average earnings” ratio has reached 129 times. In the US the figure is now over 250 times; it was 20:1 in 1965 and 30:1 in 1978.

Salary caps

One effect of high senior executive salaries is on public sector organisations’ ability to attract private-sector talent. Current salary caps for senior positions in State agencies, introduced in 2011, result in an inability of these organisations to reach out to senior private sector candidates with a meaningful offer.

Often salaries of CEOs in these important State agencies are in-line with salaries of middle management roles in the private sector. Previous benchmarking processes may have enhanced the income of mid-ranking civil servants, but has done little to help attract experienced talent.

The critics of excessive high pay are not just from the usual left -leaning quarters. Last year the UK’s Institute of Directors reported that 52 per cent of its members identified “anger over senior levels of executive pay” as a threat to public trust in business, the highest single issue of concern.

There has been some pushback on the often cited rationale of high executive pay, that such levels are required to “attract and retain” talent.

This claim is not, it seems, supported by the data on movement of such senior executives. None of the current top-10 highest paid Irish public company CEOs were poached from another business.

The average length of service of the 10 CEOs in these organisations is now a very stable 22 years, and they are highly unlikely to jump ship. In many large publicly quoted companies, there have been very vocal shareholder revolts against perceived excessively generous decisions by remuneration committees, insisting, in many cases, that performance bonus schemes become more ambitious and transparent.

Value for money

The Government has a responsibility to ensure that pay policy in the public sector is not over simplified or politicised.

An optimum policy would ensure intense focus on achieving value for money while providing sufficient flexibility to successfully attract and retain the best leadership talent.

Government also needs to enforce appropriate minimum wages in a way that does not unintentionally undermine the survival of weaker businesses; this might require some differences in rates for some exposed sectors.

Equally, businesses should act in a socially responsible manner on setting working arrangements for lower-paid employees, and exceptions to a “living wage” should be few.

Remuneration committees acting on behalf of shareholders have a huge responsibility to apply rigorous performance-related incentive schemes for senior executives, avoiding excessive and inflationary rewards.

Michael Carey @careyonfood