Executive pay: Does retail need to change its ways?

Executive pay is a bone of contention across all industries, however, Retail Week’s analysis of the UK’s highest paid retail bosses revealed that average salaries have actually fallen over the past year.

The average total package for the retail execs in publicly listed companies in the list was £1.69m, dropping 4.4% from £1.76m last year.

However, this pales in comparison to the average FTSE 100 chief executive, who saw their pay package drop 17% this year, according to research from the Chartered Institute of Personnel and Development (CIPD).

Topping this year’s best paid retail exec list was Majestic Wine’s Rowan Gormley after he benefited from a £5.2m pay-out from the Naked Wines acquisition, but he was only the 75^th best-paid executive when it came to base salary.

The other top paying companies in this year’s highest-paid execs list were WHSmith, Burberry, Tesco and Morrisons.

All four companies have been blasted by corporate governance specialist PIRC for their remuneration policies.

PIRC says Morrison’s long term incentive plan (LTIP) grant for David Potts was “excessive” at 240% of salary; performance-related pay for WHSmith chief executive Stephen Clarke at 800% of his salary is “highly excessive”; and the exceptional payments received by former Burberry chief exec Christopher Bailey are “unacceptable” considering the “poor performance” of Burberry under his management.

“Bosses often urge pay restraint on their workforces, why can’t the same consideration apply to them?”

Stefan Stern, High Pay Centre

Meanwhile, PIRC claims the ratio of chief executive to average employee pay at Tesco, which it estimates at 294:1, is “unacceptable”.

Stefan Stern, former Financial Times columnist and director of the High Pay Centre think tank, argues the executive pay system is “broken” and there is a “systemic problem” within it.

“Bosses often urge pay restraint on their workforces, why can’t the same consideration apply to them?” asks Stern.

A spokesman for Usdaw says its members are finding it “difficult to understand how huge rewards for senior management can be justified in companies where the staff are facing changes to their terms and conditions of employment, redundancy and store closures”.

Stern believes it is incumbent on everyone involved – whether that be remuneration committees, big shareholders, pay consultants, headhunters or chief executives themselves – to help change the game.

Shareholder unrest

Shareholders appear to be showing signs of unrest. More than half of Morrisons’ shareholders failed to back its remuneration report, and almost a third of Burberry shareholders revolted against the luxury fashion retailer’s remuneration report.

Meanwhile, the Government is expected to update its corporate governance bill in the autumn after the release of its green paper on the subject.

“Publicly listed companies can quite easily publish the ratio between the pay of their chief executive and the median pay in their organisation given what is happening with the introduction of gender pay gap reporting”

Charles Cotton, CIPD

Margot James, the minister responsible for corporate governance, says the Government is committed to ensuring executive pay is “properly aligned to performance” in order to improve the public’s “trust and confidence in big business”.

Proposals mooted in the green paper include making all elements of the executive pay package subject to a binding shareholder vote.

Meanwhile, the CIPD proposes companies publish pay ratios and have an employee representative on the remuneration committee.

“Publicly listed companies can quite easily publish the ratio between the pay of their chief executive and the median pay in their organisation given what is happening with the introduction of gender pay gap reporting,” says Charles Cotton, senior performance and reward adviser at the CIPD.

Cotton believes this will help encourage healthy debate within companies.

“One of the challenges of the retail sector is it is a low-wage environment and if there are concerns executive remuneration is too divorced from the pay that is enjoyed by the rest of the workforce then that can lead to resentment and the feeling among staff that there is one rule for the person at the top and another rule for them,” explains Cotton.

Do execs need big bonuses?

Questions need to be raised about the way various bonuses are structured, according to Cotton.

Sarah Lim, managing director and sector lead for retail, UK and EMEA, at headhunter Korn Ferry, says the question of whether executive bonuses could be improved is “exercising a lot of minds at the moment”.

“On the one hand just paying an annual salary would simplify things greatly,” says Lim. “But then a top performing company would pay its executives the same as a poor performing company, which is counter intuitive.”

Retailers are staunch defenders of their executive pay packages.

“Behavioural science indicates that people value being rewarded in shares less than they do cash”

“It is no coincidence that Morrisons’ much-improved performance coincides with the appointment of David [Potts] and his new senior team,” said Morrisons chairman Andy Higginson in the company’s annual report. “Whilst all have contributed to the improved performance, it is the leadership that has changed.

“We have tweaked the performance measures to reflect the challenges ahead enabling the executive team to earn up to the maximum bonus potential if outstanding long-term performance is delivered.”

Tesco says that in order to attract top talent it offers rewards, which are in the top quartile of remuneration for the sector, to staff regardless of their level within the business.

This summer it revealed hourly rates for store staff would increase 10.5% by November 2018, while a colleague bonus plan was launched last year and offers a maximum bonus of 3.5%.

WHSmith chief executive Steve Clarke’s £4.7m worth of benefits have come in large part due to the vesting of a long-term incentive plan (LTIP) following four years of record profit and a 148% increase in share price since Clarke took over, versus an average 42% increase across the FTSE 250 in the same period.

Bailey at Burberry received benefits worth £2.4m after the remuneration committee judged he should be awarded 61.7% of an exceptional bonus pot based on performance criteria set out in the 2014/15 financial year.

Cotton believes care must be taken when structuring bonuses because it can mean pay goes up significantly during the good times, but may not go down to the same extent when a business is struggling.

“With LTIPs companies can be paying out on achievements three or four years ago, so you have this lag effect which confuses things,” says Cotton.

He also argues behavioural science indicates that people value being rewarded in shares less than they do cash, and as a result share awards are made bigger to compensate.

“You may be able to give people smaller cash bonuses that are paid immediately and have just as much or perhaps even more of an incentive,” says Cotton.

However, incentivising people with cash rewards can often lead to the wrong outcomes. As evidence, Cotton cites the example of firefighters in Sicily accused of starting fires to receive bonuses for putting them out.

Can we fix it?

Stern is pessimistic about the market being able to fix inappropriate levels of executive pay in its current state because it is “broken and effectively rigged”.

“This is not a normal jobs market,” says Stern. “Chief executive jobs are not advertised openly, nor are pay rates or expectations discussed in advance. We are in a situation where people simply ask for or demand a lot of money, and get it.”

“I think the best way to change executive pay in the UK is for owners of companies to decide what is right and push changes through via influence from their boards”

Sarah Lim, Korn Ferry

As a result, he also advocates the mandatory publishing of pay ratios and employee representatives on remuneration committees to provide a “real world perspective”.

However, Lim disagrees with the need for government intervention and says there is already transparency in the market at listed companies that allows accurate comparisons of what executives earn for similar roles.

“I am not a fan of regulation, other than where it is necessary to stop systemic risk like in banking,” says Lim. “I think the best way to change executive pay in the UK is for owners of companies to decide what is right and push changes through via influence from their boards.”

In the grand scheme of things executive salaries place a relatively small burden on a retailer’s bottom line compared to the overall wage bill, but CIPD research in December 2015 found big gaps between the average employee and the chief executive can have a seriously demotivating effect.

At a time when great stock is being placed on an economy that works for everyone, retail execs cannot afford to be seen to be profiting while shopfloor staff suffer.