£15m may be price we have to pay for success

SO IF £15 million a year is not enough for a chief executive, what is? That is what Pascal Soriot, head of AstraZeneca, has been paid for the past couple of years. Now, as we report here, the company has put forward a plan that would substantially increase his earnings, and that is being challenged by some major investors. Who is right?

There are three stories here: about Pascal Soriot and what he has achieved at AstraZeneca; about executive pay in general; and about fairness in society.

The first thing to be clear about is that AstraZeneca has been a huge success story. Ten years ago, it was a middle-ranked pharmaceutical company. Now it is top rank. That has been Pascal Soriot’s achievement.

When he took over in 2012 he made some tough decisions, in particular to shift research to a new site in Cambridge, shutting down the R&D sites in Cheshire, Loughborough and Lund in Sweden. In effect, this finished the half-completed merger between the Zenec aside( IC I’ s old pharmaceutical business) and the Astra side in Sweden.

He fought off a bid by Pfizer in 2014, which valued the company at £70 billion. It is now worth £101 billion. With hindsight, that has brought a massive strategic benefit to the UK, in that it has two big pharmaceutical companies headquartered in Britain. The other is GlaxoSmithKline.

When it came to finding someone in the UK who could make the Oxford vaccine at scale, Glaxo couldn’t because it was already tied up with other plans. AstraZeneca’s full board had a presentation from the Oxford team and crucially agreed not only to do it – but to do it at cost. Given what we know now about vaccine nationalism we would have been in a lot of trouble had AstraZeneca said no. The company (and Pascal Soriot) has been criticised for the way it has presented the results of the vaccine trials. It has faced a disgraceful attack from the EU for vaccine production problems.

But nothing should take away from the contribution it has made – and will continue to make – to fighting the pandemic. It has saved a lot of lives and will save many more. It has been well led.

So how do you value that leadership? Executive pay is a genuinely difficult issue. There are two problems. One is whether to pay global rates; the other how to structure incentives. Go back a generation and UK top salaries were low by international and particularly US standards. If you wanted to hire a non-national you had to pay over the odds. Justified? Well, the Bank of England has done a huge amount of work on productivity and has found that foreign-owned firms operating in the UK have much higher productivity than UK-owned ones.

That must say something about problems of UK management, and roughly one-third of all FTSE 100 companies have either a foreign chief executive or chairman. Pascal Soriot is, of course, French. That is not to say that all countries

should go global in their hunt for talent. Japan has found it very hard to integrate non- national business leaders, as the troubling tale of Carlos Ghosn and the Nissan/Renault alliance demonstrates. But the UK has made the decision to look around the world for people to run its businesses and as a result has no option but to pay global rates.

But how do you structure a competitive executive package? The classic way is to combine a base salary with share options. The theory is that executives will try to increase the share price, which aligns their financial interest with those of shareholders. The trouble is that this can become an incentive to puff up current profits at the expense of future growth. There are plenty of examples of leaders who leave as heroes with fat share options, only for the business to hit trouble after they leave.

THE most famous is the late Jack Welch, head of General Electric in the US from 1980 to 2001. He had his picture on magazine covers and got the largest severance payment in history. Its share price then was over $50. Now it is $13. We have to get better at finding ways to reward executives that produce long-term success, rather than short-term profits. At least Pascal Soriot has played the game long. That brings us to the issue of fairness. Pay will never be truly fair, any more than other aspects of life – health, family, education and so on – are fair. But companies have a duty to try to be fair and that means being open, decent and diligent in the way they reach these decisions.

They must take shareholders with them of course, but they also need to take on board the views of employees, suppliers, customers – and the country as a whole. The more convincingly they can explain what they are doing and why, the less corrosive the issue becomes.