Attacking CEO pay is pointless and will hurt British firms

Commenting on the government's proposals to force FTSE 100 firms to publish pay ratios between their CEOs and ordinary workers, and to 'name and shame' firms if 20% of shareholders vote against the executive pay packages, Sam Bowman, Executive Director of the Adam Smith Institute, said:

"Forcing firms to publish executive pay ratios and ‘naming and shaming’ firms that face minority shareholder opposition to executive pay levels are both likely to backfire. Pay ratio information is not particularly helpful, and will misleadingly suggest that executives of firms that employ large numbers of low-skilled workers are less valuable than firms that employ skilled workers. Tesco will have a much less favourable pay ratio than somewhere like Goldman Sachs even if the two CEOs are paid the same.

"‘Naming and shaming’ firms after just 20% of shareholders vote against a executive remuneration package gives too much power to minority shareholders who may not have the firm’s best interests at heart and should not be allowed to hurt the company’s reputation if a majority of shareholders support the executive’s pay packet. It also makes firms more vulnerable to hostile takeovers as minority shareholders will be able to cause disarray by triggering a ‘naming and shaming’ of a responsible CEO. 

"The root problem with the government’s position is that many CEOs are worth a lot to their firms, sometimes well in excess of the millions that they are being paid. When Angela Arendts stepped down as CEO of Burberry the firm lost half a billion pounds in value; Tesco became £220m more valuable its CEO merely announced that he would take a more active role in managing the firm. Attacking the CEOs of FTSE 100 firms is likely to make it harder for them to attract the best leadership, and make British firms less productive and competitive compared to their foreign rivals – and that will hurt those firms’ workers as well as its shareholders."

For further comment or to arrange an interview please contact Sam Bowman via phone 02072224995 or email sam@adamsmith.org.