Banker Bonus Cap Removal Bursts Fair Pay Bubble
Academics question the logic behind higher pay for talent retention, as further pay votes are set for AGMs later this month.
HSBC’s decision to scrap a cap on bankers’ bonuses at last week’s AGM could open the floodgates for rising executive pay, further aggravating investor concerns around fair pay.
The vote to remove the cap received 99.3% shareholder support, allowing the bank to set a new limit for bonus and significantly increase payouts. HSBC paid its top investment bankers an estimated average bonus of US$771,700 last year, while median employee pay at the bank sits at £63,000 (US$79,000).
“It’s reflective of the general direction of travel with senior management pay in the UK,” Lindsey Stewart, Director of Investment Stewardship Research at Morningstar, told ESG Investor. “There’s a conviction, certainly among companies, boards and management, that higher pay has to be part of the equation for talent attraction and retention.”
Before the meeting, Stewart suggested the vote would “likely become a focal point for the UK’s conversation on executive pay”.
Overall trend
Under the previous legal cap, an employee’s bonus could not exceed 100% of their annual pay, or 200% with shareholder approval. These limits were scrapped from 31 October 2023 by then-Chancellor Kwasi Kwarteng’s mini budget.
Similar votes are due to take place at Barclays’ AGM on 9 May and Lloyds’ on 16 May. Beyond the UK, proxy advisor Glass Lewis has urged Morgan Stanley shareholders to vote against an executive pay proposal at its AGM on 23 May.
“The overall trend is going to be preserved,” said Stewart. “With HSBC is having approved this, it’s unlikely that we’ll see a rejection of those decisions at Lloyds or Barclays.”
Last week, Goldman Sachs removed its bonus cap for UK bankers, meaning they can now earn more than the previous limit of double their base pay. The decision was criticised by British trade unions.
The median pay for S&P 500 chief executives rose 9% to US$15.7 million in the year to April 15, increasing the gap between top management salaries in the US and UK. UK executives have complained they are underpaid compared to US peers, with several warning of a talent exodus without more competitive pay.
Last year, London Stock Exchange CEO Julia Hoggett warned that higher pay salaries were needed in the upper reaches of UK firms to retain listings and secure talent.
“The incentive point is at the core of it,” Stewart explained. “There has been some concern among company management on whether the pay quantum and structure in the UK is sufficient for them to compete in a mobile international market for talent.
“It complicates the landscape for UK asset owners that have for some time been concerned about the growing gap between the pay of senior executives – particularly CEOs – and the wider workforce.”
However, a letter sent to the Financial Times earlier this week argued that UK executive pay levels look “competitive” when compared to Europe rather than the US. Median pay for the companies listed on the pan-European Stoxx 600 index, including the largest UK companies, was €3.5 million (US$3.8 million) in 2022.
Anecdotal evidence
Despite a pause in response to the Covid-19 pandemic, rising pay differentials between senior executives and the average worker have been a growing concern for investors and other stakeholders in recent years. Doubt has also been cast over claims of the need to compete harder for talent.
A letter from 20 academics co-ordinated by the High Pay Centre in March argued there was “limited evidence beyond individual anecdotes” of UK companies failing to attract or retain key executives due to low pay levels.
The letter warned widening pay gaps between executives and ordinary workers could have negative impacts on employee engagement, productivity and business performance. It added higher executive pay by major employers risks triggering an increase in income inequality, leading to socio-economic problems that would damage the UK’s long-term prospects of economic success.
“Evidence of a ‘brain drain’ from the UK to the US and the dubious basis for thinking that a better paid CEO automatically leads to better business performance is limited beyond the anecdotal,” the High Pay Centre stated in a separate release last month.
Investors have looked to address issues with the executive pay system through the creation of a Fair Reward Framework, which is due to be released this month. The framework was developed by pension funds including the Church of England Pensions Board and Brunel Pension Partnership to respond to issues surrounding corporate pay, following a 2022 review which concluded that the global executive pay system was “broken”.
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