In many ways, Rakesh Kapoor was not the most outrageous example of an over-rewarded, underperforming chief executive, nor was he the one who most deserved a shareholder revolt to reduce his pay. Over the years there have been plenty more justified examples of greed and incompetence. And yet the decision by the board of the household goods giant Reckitt Benckiser to scrap his bonus for the year, following a scandal at its South Korean unit, may well turn out to have greater long-term significance than most. It is one of the very few examples of a CEO of a major FTSE company suffering financially along with his or her shareholders.
No one can have any doubt that CEOs’ pay is a scandal that has been building for two decades, and perhaps even longer. Year by year the rewards for running a major company have grown ever more extravagantly, while the pay of ordinary workers has stagnated, and returns to shareholders have been consistently meagre. Between 2002 and 2013, for example, the average pay of a FTSE chief executive went up by 73%, and yet over that time the index itself hardly moved. Was British business twice as well run over that decade, or was the challenge of managing a big business twice as hard? Of course not. A small group of people have rewarded themselves handsomely, with little regard either for their shareholders or the wider reputation of the firms they run.
There have been a few examples in the last three years of shareholders starting to get to grips with that. In January, Imperial Brands, the company that includes Gauloises and John Player cigarettes among its assets, scrapped a planned pay policy for its CEO Alison Cooper, after a number of major institutional shareholders took a stand against a package that would potentially have increased her remuneration to up to £8m a year. Shire saw a revolt over its pay last year. But Kapoor is a big enough scalp to be made an example of. He was – before the cut – the third-highest paid CEO on the FTSE, and Reckitt is one of the UK’s biggest and most successful global firms. Institutional shareholders have been taking a tougher stand. BlackRock, for example, recently wrote to the 300 largest listed firms in the UK to say it would only approve pay rises for the board if staff were given similar increases in percentage terms. Since BlackRock is typically a top three shareholder in most firms, on account of its sheer size, that will make a difference.
But more needs to be done. The most powerful move shareholders could make would be to follow up the pay cut for Kapoor with a series of high-profile strikes. John Fallon at Pearson would be the most obvious example – it is shocking that he has not seen any consequences for a series of blunders that have hammered the shares. Dave Lewis at Tesco, for all the hype around his rebuilding of the chain, has yet to improve the share price and the acquisition of Booker may not go well. EasyJet has been having a rough ride under Carolyn McCall– why not reflect that in her pay? Some might be justified, others less so – but at least a modest cut would send a signal that what happens to the business matters.
Excessive pay is not a right-left issue. There is nothing pro-business about letting a small group of CEOs take far larger rewards than their shareholders or their staff. If anything, it is the executive pay racket that is anti-business. The real rewards of a free-market system should go to entrepreneurs and risk-takers, not people who run long-established businesses. A good start has been made – but there is still a long way to go before the problem has been fixed.