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The UK’s worsening cost of living crisis is reviving resentment over earnings inequality. High chief executive pay is set to attract public criticism as companies announce profits in coming weeks. But the likes of Julia Hoggett, head of the London Stock Exchange, have argued that competitive boss remuneration makes the UK competitive too.
Latter-day levellers note that median FTSE 100 chief’s pay is 100 times that of the typical worker. Meritocrats riposte that bosses of S&P 500 companies earn triple the remuneration of UK peers.
A point of agreement could be that complex UK boss pay reduces its incentive value, regardless of quantum.
The widespread adoption of performance share plans has pushed reward times well into the future. Typical long-term investment plans run for three years before executives get an award. Almost all must now wait a further two years before they can take ownership.
This gives time for employers to claw money back if need be. But the fact that most post-award changes to pay are negative emphasises downside risks and diminishes perception of value.
The other problem with long-deferred rewards is their embarrassing tendency to deliver bumper packages to chiefs in years when businesses are faltering.
One solution is to mix share plans with restricted stock units. Such hybrid schemes are common in the US. The recipient cannot take ownership of restricted stock until a vesting period ends. But the number awarded is typically fixed at the outset rather than determined later by a performance formula.
Unfortunately, UK shareholders have taken against restricted stock. “The perceived negative impact of receiving 20 per cent or more votes against a pay plan is arguably the biggest hurdle for change,” says James Harris of professional services firm Alvarez & Marsal.
Investors should reconsider. Pay campaigners complain chiefs require bonuses to feel the motivation ordinary workers get from flat rate pay. Restricted stock is one viable compromise.
The Lex team is interested in hearing more from readers. Please tell us what you think of restricted stock in the comments section below.