INSIGHT-CEOs warned: mind the pay gap

Thu Aug 4, 2011 7:47am EDT

* Stellar executive pay in focus as economy stalls

* U.S. wage disparity four times that in Sweden

* S&P 500, FTSE 100 CEO pay up by third in 2010

By Ben Hirschler and Scott Barber

LONDON, Aug 4 (Reuters) - A stuttering economy and anaemic profit growth means company bosses' pay is unlikely to rise as fast this year as in 2010, but complaints from politicians and disgruntled shareholders over executive rewards are not going away.

If anything, the heat is increasing.

Britain, a traditional leader in corporate governance, is weighing new ways to rein in excessive salaries and bonuses; European and U.S. officials are aiming for more disclosure; and Australia has just passed tough new rules that could force board resignations.

In the good times, the man or woman in the street may not think too much about chief executives' pay packets. Today, faced with an extended squeeze on real living standards, things feel very different.

Not surprisingly, the gap between the top and bottom on pay is biggest in the United States, where average CEO remuneration is 142 times that of employees, according to Thomson Reuters ASSET4 data. British CEOs pull in 69 times more than their workforces while egalitarian Sweden has an average differential of only 34 times.

After the hiatus of the recession, the gap between the boardroom and the shop floor is yawning wider.

"At a time of austerity, it does stand out as being particularly egregious," said Deborah Hargreaves, chair of Britain's independent High Pay Commission (HPC), set up by left-of-centre pressure group Compass with backing from the Joseph Rowntree Charitable Trust.

If current trends continue, by 2030 wage disparity will reach levels of inequality not seen since Victorian times, her organisation projects.

Perceived excesses, particularly in the banking sector, chime with politicians who are all too aware of simmering voter anger on the issue. The numbers certainly don't look good.

Median compensation for CEOs at S&P 500 companies increased by 33 percent in 2010, according to International Shareholder Services, which advises investors on corporate governance.

In Britain, pay for leaders of FTSE 100 companies was up 32 percent, while workers' pay increased just 2 percent, figures from pay consultancy MM&K and corporate governance group Manifest show.

And while this year's pay increases may be lower, many CEOs still stand to benefit from share options granted in the depths of the downturn when stock prices were far lower.

Companies argue that pay policies are more tightly tied to performance than ever, but dissident shareholders -- still a minority -- are growing frustrated.

"This isn't just about shareholders letting off a bit of steam. This is about shareholders having serious concerns about the linkage between strategy and stratospheric pay," said Sarah Wilson, chief executive of Manifest.

EGALITARIAN GOLDMAN

In the United States, the Dodd-Frank corporate governance legislation -- which has this year brought "say-on-pay" votes to annual meetings -- is set to require firms to disclose the ratio of the CEO's pay to that of the median of workers.

A simple ratio, however, can be a blunt instrument.

Goldman Sachs , for example, emerges as the U.S. corporation with the flattest pay structure in the Thomson Reuters dataset, reflecting the fact it has thousands of high earners on its payroll. The investment bank typically distributes around 40 percent of its revenue in employee pay.

The biggest differentials -- more than a thousandfold -- are to be found at KFC parent Yum Brands and McDonald's , with their vast armies of low-paid chicken fryers and burger flippers.

In Europe, such huge differentials are less common, but the trend varies across the continent. British supermarket chain Tesco has a salary gap twice as large as that of German rival Metro .

Germany's two-tier management structure, with supervisory boards that include worker representatives overseeing the executive board, is a clear force for pay restraint.

"The workers keep things in check," said a management pay consultant who declined to be identified.

British business minister Vince Cable -- who has a fresh spring in his step after emerging as a rare winner in the News Corp scandal -- has lashed out at the "ridiculous levels of remuneration" for company bosses and aims to take a targeted approach in a planned consultation process on changes to reporting standards.

At a meeting last week, he was urged by HPC to consider requiring companies to disclose how much of revenue goes to pay executives compared with dividend payouts, capital investment and total remuneration.

The rest of Europe is further behind. Still, the European Commission in April produced a discussion document on corporate governance asking if disclosure of boardroom pay and remuneration policy should be mandatory, and put to a vote by shareholders.

In Australia, a new "two strikes" rule implemented this month gives shareholders the right to replace a board if a quarter of votes oppose a company's remuneration report in two successive years.

To date, shareholder action on executive pay has been limited. The first "say-on-pay" season in the United States, giving shareholders an advisory say on executive pay, has seen less than 2 percent of companies lose their votes.

But around one in six companies did get less than 80 percent shareholder support, according to a survey last week by consultancy Towers Watson, and those companies are now being forced to take the issue seriously.

In Britain, where voting on the remuneration report has been in place since 2003, the average level of dissent in shareholder votes at this year's AGMs was 9.5 percent, according to Manifest.

Ironically, increased pay transparency may be a double-edged sword as boards jockey to benchmark against the competition.

"Boards seem to think it is a dereliction of duty or an admission that their chief executive isn't quite up to it if they're not being paid in the top quartile -- but that just leads to an ever increasing ratchet up," said HPC's Hargreaves. (Additional reporting by Marilyn Gerlach in Frankfurt; Editing by Andrew Callus)