Shift in tolerance for CEO bonuses

Protests in the UK about executive pay are louder than elsewhere this year. Investors are urging that companies reflect on the views of a government that has promised to address the wide gap between society’s elite and its ordinary workers. The debate is no longer just about the CEO’s bonus as a fair reflection of the value he or she generated for shareholders, but whether the amount is morally defensible in any case.

In purely financial terms, it is an odd year to brace for rebellion. Corporate performance has been strong. The FTSE 100 index in the UK and the S&P 500 in the US are both up by nearly a quarter over the past 12 months. But after seven years of UK austerity policies and a Brexit vote that was blamed in part on anti-elitist populism, opposition to high pay has hardened.

Although income inequality data show a narrowing gap between rich and poor, the extremes remain politically unpalatable. The average blue-chip CEO in the UK earned £4.3m in 2015. The average national wage was £28,000. When Theresa May became prime minister, she signalled the gap would be an issue for her government. A green paper on corporate governance reform focused on pay. A compelling macroeconomic argument for change is made by Andrew Smithers and others, positing that poorly designed bonus schemes have held back investment and productivity growth.

All of this has led to a shift of attitudes. Companies, in the UK at least, seem keen to engage with shareholders on pay schemes. Big institutional shareholders report 50% more pay meetings with companies than usual. If behind-the-scenes deals cannot be reached, this year’s shareholder meetings could be unusually fractious.

In 2012, there was a so-called “shareholder spring” when a long list of companies across the US and Europe — among them Citigroup, UBS, AstraZeneca, Barclays and Aviva — had pay plans shot down. Another may be looming. London, February 15.