The first year of new UK disclosure rules did not curb CEO pay or enhance the link between CEO pay and performance at FTSE 100 companies, but rather saw companies opting to ‘cherry pick’ information which would enhance their reputation, according to recent academic research
A study by Cambridge Judge Business School and King’s College looked at the first-year results of UK disclosure rules that took effect 1 October 2013, which applied to quoted UK companies in financial years ending on or after 30 September 2013.
Researchers claimed to have found ‘opportunistic reporting for the sake of reputation management’, and say their analysis shows that in submitting comparative information about pay of CEOs and employees, many big UK companies ‘self-select’ by choosing only certain geographies or types of workers. They say this approach ‘seriously compromises the reliability’ of the comparative disclosure rules.
Dr Jenny Chu of Cambridge Judge Business School and a co-author of the report said: ‘Companies have such wide discretion as to which employees they include in the comparator information that this disclosure really loses its effectiveness. We also found that in their first year the rules didn’t enhance the link between CEO pay and performance, nor did they reduce the CEO-employee pay discrepancy.’
The study looked at 91 UK companies (excluding those FTSE 100 firms not incorporated in the UK and thus exempt from the disclosure regulations) over three fiscal years ending in 2014.
The analysis showed that firms had a ‘high degree of flexibility and variation’ in choosing their comparator groups – with only 24 of the 91 firms including employees from all geographic regions and all levels. Some firms chose only an ‘arbitrary percentage’ of employees (such as 40%), or only senior management, or only employees in certain geographic areas such as London.
It concluded: ‘We therefore question whether this disclosure truly assesses the issue of widening pay gap. Instead, managers may have opportunistically engaged in reputation management by cherry-picking the group of employees that best serve for comparison. In our opinion, this disclosure falls short in addressing concerns of greater transparency in disclosure of wage inequality.’
The study found that in 2013 the average CEO earned £5.57min total (including salary, bonus, benefits and equity pay) with cash pay (salary and cash bonus) of £1.64m, compared to £4.68m and £1.57m, respectively, in the two-year period before the regulations took effect. The ratio of total CEO pay to average employee pay was stable between the pre- and post-regulation periods, from 123.01 to 122.37, the study found.
Companies reported, based on their comparator groups that employee salary (up 3.64%) and bonuses (up 22.66 %) increased at a higher rate than CEO salary (up 0.2%) and bonuses (up 14.03%) before and after the rules took effect.
However, the research shows the increase in CEO benefits (up 9.5%) was nearly six times that of employees (up 1.6%). The researchers say this may translate to a considerable increase in absolute levels of remuneration, and point out that this comparison does not include equity-linked pay, a large component of executive pay.
The study also found that firms with prior advisory shareholder votes of dissent on executive pay actually had less voluntary disclosure, greater pay and higher pay ratios between CEOs and other employees.
This, the researchers said, supports other new rules introduced in 2013 that requires a binding vote on remuneration policy at least every three years, or at the next annual general meeting if the company’s remuneration report fails to achieve a majority advisory vote.
The study, entitled “Form over substance? An investigation of recent remuneration disclosure changes in the UK”, is authored by Jenny Chu, university lecturer in accounting at Cambridge Judge; Aditi Gupta, lecturer in accounting at King’s College London and Xing Ge, who worked on the study while attending King’s College London.
