UK Unveils Regulation Compelling Large Firms to Disclose, Explain Pay Ratios

UK Unveils Regulation Compelling Large Firms to Disclose, Explain Pay Ratios

Amid growing public and investor concern about major British companies potentially overpaying their top executives, the UK government has been kicking around the idea of instituting a pay ratio reporting rule since last year. The government hinted in April that it would propose the regulation soon, and now it is here. The proposal, which Business Secretary Greg Clark is presenting to Parliament today, will require all companies with more than 250 employees to disclose the ratio between the pay of their CEO and their average or median employee, as well as to explain this difference, the BBC reports:

The new rules, as well as introducing the publication of pay ratios, will also require listed companies to show what effect an increase in share prices will have on executive pay, in order to inform shareholders when voting on long-term incentive plans. … Mr Clark said: “Most of the UK’s largest companies get their business practices right, but we understand the anger of workers and shareholders when bosses’ pay is out of step with company performance.”

The plans were welcomed by the Investment Association – that represents UK investment managers – as well as business lobby group the CBI and think tank the High Pay Centre. Chris Cummings, chief executive of the Investment Association, said investors wanted greater director accountability and more transparency over executive remuneration.

That investors are leading the charge for transparency on executive compensation is unsurprising; activist investors were also key proponents of the pay ratio reporting rule that came into effect in the US earlier this year. Shareholders are voicing greater interest in exercising their “say on pay” prerogatives, particularly after recent scandals in the UK over executives receiving massive bonuses, in some cases without company performance justifying them.

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How Can Companies Make the CEO Pipeline More Inclusive?

How Can Companies Make the CEO Pipeline More Inclusive?

A recent analysis from the Pew Research Center took a closer look at the gender gaps in corporate leadership in the US, focusing on top-level executive positions and the roles from which senior leaders are most commonly promoted to them. Drew DeSilver wrote up the analysis late last month at Pew’s Fact Tank blog:

Women held only about 10% of the top executive positions (defined as chief executive officers, chief financial officers and the next three highest paid executives) at U.S. companies in 2016-17, according to a Pew Research Center analysis of federal securities filings by all companies in the benchmark Standard & Poor’s Composite 1500 stock index. And at the very top of the corporate ladder, just 5.1% of chief executives of S&P 1500 companies were women.

Nor do many women hold executive positions just below the CEO in the corporate hierarchy in terms of pay and position. Only 651 (11.5%) of the nearly 5,700 executives in this category, which includes such positions as chief operating officer (COO) and chief financial officer (CFO), were women. Although this group in general constitutes a significant pool of potential future CEO candidates, the women officers we identified tended to be in positions such as finance or legal that, previous research suggests, are less likely to lead to the CEO’s chair than other, more operations-focused roles.

That women are underrepresented among CEOs and other high-level executive positions is hardly breaking news. The most interesting finding from Pew’s analysis is that three-quarters of the CEOs studied had previously held leadership roles in operations: a function where women are significantly underrepresented. At the same time, the gains women have made in obtaining executive roles in finance, legal, and HR are not putting these women leaders on the CEO track.

This finding builds on other recent research showing that although women’s representation in management has increased dramatically over the past few decades, women are still segregated into leadership roles that are less production-focused, less highly compensated, and less likely to be career stepping stones toward the top of the pyramid. We see the same thing in boardrooms: Even as more women directors are appointed, they remain less likely than their male colleagues to achieve positions of influence on the board.

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UK to Introduce Pay Ratio Disclosure Law in May

UK to Introduce Pay Ratio Disclosure Law in May

The UK government will propose legislation next month that will require companies to publish the ratio between the compensation of their CEO and that of their median employee, the Financial Times reported on Sunday. The rule is expected to come as part of a package of corporate governance reforms meant to address inequality by reining in executive compensation practices widely seen as excessive, which will also require boards of directors to demonstrate that they have acted in the interests of their companies’ employees, customers, and other stakeholders, rather than just the interests of investors. Large companies will also be required to certify compliance with a corporate governance code.

The writing has been on the wall for UK companies for some time now. The government first announced plans to institute a pay ratio reporting requirement last August, as well as to “name and shame” companies whose investors object to their executive pay packages. Recently, several large British companies have faced drubbings from investors and the media over the millions of pounds in bonuses they paid out to their top executives this year

At the beginning of this year, a report from the CIPD and the High Pay Centre revealed that the average FTSE 100 CEO earned £3.45m last year, or 120 times the £28,758 earned by the average British worker. At an average hourly rate of £898 per hour, the top CEOs earned more than the average employee by the third working day of the year, which campaigners quickly dubbed “Fat Cat Thursday.”

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Will Pay Ratio Disclosures Tell Investors What They Want to Know?

Will Pay Ratio Disclosures Tell Investors What They Want to Know?

Public companies in the US recently began publishing the ratios between the pay of their CEO and that of their median employee in compliance with a regulation adopted by the Securities and Exchange Commission in 2015 that went into effect in the 2017 fiscal year. The regulation, prescribed by the 2010 Dodd-Frank financial reform legislation, had been a potential target for revision, or reversal by the Trump administration, but major institutional investors, particularly activist funds, pressured the SEC not to delay or discard the rule.

As the due date for disclosure approached, executives expressed anxiety about how to communicate these figures to their employees, as well as how the media and shareholders would react. With regard to employees, the concern was not so much that they would learn their CEO was earning an outrageously large salary, but more that half of them were about to learn that they earned less than the median employee and would want to know why.

So far, over 500 companies have published their disclosures, and according to an analysis last month by ISS Analytics, “the numbers have landed all over the map,” from 1.87 for Berkshire Hathaway CEO Warren Buffett, to 2,526 for Aptiv PLC’s Kevin Clark (the median ratio for S&P 500 companies was 166:1). The SEC rule requires companies to compare salary alone, so the ratios don’t account for what CEOs earn from capital gains and dividends.

Because of this limitation, David McCann recently commented at CFO, the rule isn’t as helpful to investors as it’s supposed to be, as it allows some companies to massively undercount how much money their CEOs really make. McCann points to the examples of the private equity firms Apollo Global Management, which reported that its CEO Leon Black was paid $250,888 last year, and Carlyle Group, whose founding co-CEOs David Rubenstein, William Conway, and Daniel D’Aniello each earned $281,315. These numbers are only slightly higher than the pay of the hedge funds’ median employees, but, McCann argues, they are also meaningless:

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Disney Shareholders Push Back on Board’s Executive Compensation Plan

Disney Shareholders Push Back on Board’s Executive Compensation Plan

Bob Iger, the CEO of the Walt Disney Company, received a total compensation of $36.3 million in fiscal year 2017, if all goes well, could earn more than twice that figure this year. The company’s investors, however, have balked at the board’s plan to reward Iger so generously, voting 52–44 percent against a non-binding advisory resolution approving Disney’s executive compensation pan at its annual shareholder meeting, Bloomberg reports.

Three proxy advisors had urged investors to reject the plan, which they said was misaligned with performance, but the board insists that Iger’s compensation package is worth making sure he remains on board through the completion of Disney’s ongoing $52.4 billion deal to purchase 21st Century Fox:

“The board decided it was imperative that Bob Iger remain as chairman and CEO through 2021 to provide the vision and proven leadership required to successfully complete and integrate the largest, most complex acquisition in the company’s history,” Aylwin Lewis, head of the Disney board’s compensation committee, said Thursday.

Bloomberg notes that this is the first time Disney shareholders have pushed back on an executive compensation package since federal regulators began encouraging these “say on pay” votes in the 2010 Dodd-Frank Act. Indeed, such rejections are still a rare occurrence in corporate America generally. Just 1.2 percent of S&P 500 companies had their advisory pay resolutions opposed by a majority of investors in 2017, Reuters reports, citing data from ISS Analytics.

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EasyJet CEO, BBC Stars Take Pay Cuts for Gender Equality

EasyJet CEO, BBC Stars Take Pay Cuts for Gender Equality

EasyJet, the discount airline based out of Luton, UK, announced on Monday that its CEO, Johan Lundgren, had asked the board to reduce his salary to match the compensation his predecessor Carolyn McCall was earning when she left EasyJet last year. Lundgren’s salary, originally set at £740,000, will now be reduced by 4.6 percent to £706,000, the company said in a statement. All other aspects of his remuneration package are identical to McCall’s.

The airline suffered a bit of negative press this month after publishing its gender pay gap in line with a new UK law requiring all organizations with over 250 employees to do so. EasyJet reported a 51 percent pay gap between men and women, attributable to the fact that its pilots—the most highly-compensated frontline employees in the industry—are 94 percent male. In Monday’s statement, EasyJet stressed that this imbalance was true of the entire commercial airline industry and that the company was taking steps to create more opportunities for women pilots:

Around 4% of commercial pilots worldwide are female. easyJet does better than the industry as a whole at 5% and easyJet’s progressive culture has enabled female pilots to progress more easily than at other airlines. In fact, over a third of easyJet’s female pilots are already Captains. But we recognise we need to do better. That is why three years ago easyJet launched our Amy Johnson Initiative to encourage more women to enter the pilot profession. We set a target that 20% of new pilots should be female by 2020, up from 6% in 2015.

Last year we recruited 49 female new entrant co-pilots. That’s a 48% increase on the previous year and takes the proportion of easyJet new entrant female pilots to 13%. This is a great achievement given the deep seated view in society that being a pilot is a male job and means the airline is on track to meet our 2020 target.

EasyJet’s announcement comes just days after the BBC revealed that six of its most high-earning male presenters had agreed to take pay cuts to close the gap with their female colleagues, :

The BBC said Huw Edwards, Nicky Campbell, John Humphrys, Jon Sopel, Nick Robinson and Jeremy Vine had all accepted reduced wages. … Vine said: “It needs to be sorted out and I support my female colleagues.”

The Radio 2 and Eggheads presenter was the best-paid of the group, earning between £700,000-£749,999 in 2016/17. The new salaries haven’t been revealed. Of the six, Jon Sopel, the BBC’s North America editor, earned the least, in the £200,000-£249,999 bracket – compared to Carrie Gracie’s £135,000-a-year salary.

Gracie, formerly the network’s China editor, resigned her position earlier this month in protest against the stark disparity in pay between male and female editors. The public disclosure of high earners’ salaries at the BBC last summer sparked major controversy when it was revealed that the broadcaster’s highest-paid talent was overwhelmingly white and male, while women were making much less than men in similar roles. BBC Director General Tony Hall later commissioned an equal pay audit of the company, which the BBC says will be published this week.

Second Study Finds Activist Investors More Likely to Target Women CEOs

Second Study Finds Activist Investors More Likely to Target Women CEOs

In 2016, a study from Arizona State University found that female CEOs were significantly more likely than their male peers to be targeted by activist investors. A new study by University of Alabama management professors Vishal K. Gupta and Sandra Mortal and the University of Missouri’s Daniel B. Turban comes to the same conclusion. The authors present their findings at the Harvard Business Review:

To test this, we analyzed data from 3,026 large U.S. firms between 1996 and 2013. We identified activist investor activity by looking at Securities and Exchange Commission (SEC) records. Shareholders who acquire more than 5% of the voting stock of a public company with the intention of influencing management are required by the SEC to file a Schedule 13D form. We found over 1,500 13D filings for 1,090 firms in our sample. …

We found that firms in our sample led by male CEOs were targeted by an activist 6% of the time during the study period, versus 9.4% when the CEO was female. Wolf pack attacks occurred for male and female CEOs at 1% and 1.6%, respectively. Even though these differences appear small, this means that firms with female CEOs were 50% more likely to be targeted by activists and approximately 60% more likely to be targeted by multiple activists.

The authors had hypothesized that investors were susceptible to gender role stereotypes that associate men with stronger leadership skills, and thus would be more inclined to scrutinize the actions of female CEOs, whom they either consciously or unconsciously believed to be less competent:

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