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Executive Pay Envy Sparks Salary Increases in UK and Europe

UK and European CEOs eye US pay scales amid shareholder scrutiny and regulatory challenges, as China's brokerage industry faces cutbacks.

By Athena Xu

4/17, 00:16 EDT
AstraZeneca PLC
Banco Santander, S.A. Sponsored
Smith & Nephew SNATS, Inc.
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Key Takeaway

  • UK and European executives eye higher US pay, pushing companies like Smith & Nephew and AstraZeneca to propose significant salary increases despite shareholder concerns.
  • The effectiveness of performance-linked executive pay, incorporating sustainability and diversity metrics, is under scrutiny in both Europe and the US.
  • China's brokerage industry faces cutbacks, with firms reducing analyst teams by up to 40% amid market slump and regulatory changes.

Executive Pay Envy

Top executives in the UK and Europe are eyeing the larger pay packages of their American counterparts with increasing envy. The disparity in compensation is partly attributed to the sheer size of US companies, which often boast revenues and profits beyond the reach of many European firms. However, cultural differences also play a significant role. A study by Deloitte revealed that while UK and western European CEO pay is comparable, US executives receive median pay substantially higher. This discrepancy is further amplified by the UK's weakened pound post-Brexit, diminishing the value of UK executive salaries in dollar terms. Despite concerns over exacerbating inequality, there's a recognition that competitive pay is crucial for attracting top talent, as evidenced by high turnover among chief financial officers in the UK.

Pay Raises Amid Shareholder Scrutiny

Several UK and European companies are pushing for higher executive pay to compete with US standards, despite the risk of shareholder revolts. Smith & Nephew, Santander, AstraZeneca, and the London Stock Exchange Group have all proposed significant pay increases for their top executives. Smith & Nephew's board, for instance, is seeking approval for a nearly 30% increase in the maximum payout for CEO Deepak Nath, to $11.79 million. This trend is gaining momentum, with Deloitte noting a substantial rise in FTSE 100 companies proposing new, more generous pay policies this year compared to last.

Performance-Linked Pay and Regulatory Challenges

As UK and European firms consider higher executive compensation, the importance of linking pay to performance is underscored. However, the effectiveness of long-term incentive plans, including clawback and "malus" clauses, remains uncertain. The banking sector's experience during the 2008 crisis highlighted the risks of incentive structures that prioritize short-term gains. Moreover, incorporating sustainability and diversity metrics into pay plans has raised concerns over their potential to be "subjective, fluffy, and easily gamed." This skepticism is growing in the US as well, where shareholder opposition to extravagant pay packages has surged.

Brokerage Industry in China Faces Cutbacks

In China, the brokerage industry is undergoing significant retrenchment due to a prolonged market slump and regulatory changes. Firms like Guotai Junan Securities have seen senior analysts resign over pay cuts and stricter performance metrics, with one brokerage reducing its analyst team by 40% and slashing bonuses. The traditional commission-based compensation model is under pressure from regulatory proposals and diminishing investor interest in China's stock market. This downturn has led to a reevaluation of the value and credibility of equity research, with concerns over the homogeneity and utility of analysts' work.

Street Views

  • Mitul Shah, Deloitte (Neutral on UK and European executive pay):

    "Boards have become braver, recognising that this is the right thing to do."

Management Quotes

  • Rupert Soames, Chair of Smith & Nephew:

    "The UK’s historic high-minded attitude on high pay is not actually sustainable."