Executive pay: Have the fat cats of food and drink had their fill?

One took a company on the brink of collapse and made it profitable. The other ran a business that achieved modest revenue growth of 6%. One increased his pay by 81% to £23m. The other took a massive 60% pay cut. So which was which?

The answer defies common expectations. While achieving growth in the current fmcg market is not easy (and operating profits increased by 4%) did Reckitt Benckiser CEO Rakesh Kapoor deserve to nearly double his salary? His £12.3m pay in 2014 was hardly shabby.

At the other end of the scale, The Co-operative Group CEO Richard Pennycook’s reward for reversing the society’s misfortunes - returning The Co-op to profit and reducing its debt by £51m - was a fraction of Kapoor’s at £3.6m. Yet he will take a voluntary 60% pay cut over the next year, earning him £1.4m (93% less than Kapoor’s pay packet).

Of course, the two businesses are very different. One is a global fmcg giant. The other a UK-only retailer. But coming in the same week, the contrasting media coverage could not have been greater. While Pennycook was almost universally praised, Kapoor came under heavy fire, and 18% of shareholders voted against the remuneration report last week.

So how does executive pay in the food and drink sector compare with these two extremes, and has it spun out of control?

Criticism of executive pay is nothing new. Reckitt Benckiser has form here. The same thing happened in 2009 when it paid Kapoor’s predecessor Bart Becht £92m - a record salary in fmcg. But taking a pay cut is a rarity among CEOs. Dan Price, CEO of Seattle-based company Gravity Payments, was hailed as a pioneer when he cut his own pay to give staff higher wages back in November 2015.

The Robin Hood move cast a new light over the executive pay debate. Should companies take money from their CEO salaries for the benefit of their employees? And how can they complain about the national living wage when top salaries often stray into eight figures?

The backlash against sky-high salaries extended beyond the typical disgruntled unions and shareholders, and to the City itself. Last month, a report by the executive remuneration group - an independent think-tank of five business heavyweights including Sainsbury’s chairman David Tyler - suggested executive salaries had been recession-proof, pointing out that they had more than trebled over the past 18 years despite the FTSE trading at “broadly the same levels”.

There has been “no real let-up” in the rise of CEO pay packets over the past 20 to 30 years, agrees independent think tank the High Pay Centre. Its analysis of pay at 71 FTSE 100 companies showed 40 of these CEOs had received an increase in their single-figure wage from 2014 to 2015.

The food and drink sector is no exception. Among the global fmcg companies (see box, left), salaries regularly venture into eight figures, though it’s worth pointing out Kapoor’s pay packet exceeds that of much larger and more profitable firms.

The salaries of the top UK grocery retail bosses are more modest - if seven-figure sums can be described as such - but are generally on their way up. An analysis of pay at the top 10 retailers (see box, left) shows the average CEO took home £2.2m in 2014/15, compared with £1.9m in 2013/14 - an increase of 16%.

The increases in pay packets haven’t necessarily correlated with an increase in company profits. In the case of Tesco CEO Dave Lewis, the very opposite in fact. Despite the company making the second largest loss in UK corporate history the year he joined, he took home £4.1m for his first seven months in the job. This was £2.5m more than predecessor Philip Clarke received for the full 2013/14 financial year, and mostly the result of a ‘golden hello’ in recompense for the share options he forfeited when he joined from Unilever.

With his strategy now starting to bear some fruit Lewis is expected to receive a bonus of £3m when his remuneration is announced later this month. But amid the complex and often clandestine performance metrics devised by pay and remuneration boards, executive pay can bear little relation to the performance of a company.

What really grates is that CEO pay rises are going against the grain, with wages in non-executive positions “stagnating”, says the High Pay Centre director Stefan Stern. He believes the discrepancy is likely to be “even greater” at supermarkets than the average company. Unite says most supermarket workers are “struggling to get by” on the national living wage of £7.20, while CEOs are “filling their boots”. It sends a “very bad message,” says Unite national officer for food and drink Julia Long, who adds that, overall, UK workers take home £40 less a week than in 2010.

And in a survey of 1,030 adults commissioned by HR body CIPD, six in 10 said high CEO salaries undermined employee motivation.

So should companies take heed of this widening pay gap when setting executive salaries? Yes, says Claire Salmons, MD of The PR Doctor. “Negative publicity can cause a company to lose its reputation in the blink of an eye, which can impact on finances, destroy trust between a company and its customers, staff, suppliers. It’s no understatement to say it could ultimately undermine the whole business.”

Conversely Pennycook’s decision to take a pay cut has resulted in and was described by chairman Allan Leighton as “the Co-op difference in action, as we champion a better way to do business for our members and their communities”.

Decisive move

So will others follow suit? “Pennycook’s pay cut was a decisive and eye-catching move,” says Raj Mehta, head of EMEA commerce and industry at recruitment company Eximius, but generally boards are prepared to pay above the odds to tempt the best candidates for the top role. “Those that command the highest salaries are the ones who bring something different to the table,” Mehta says. He believes some “pay for themselves” by inspiring positive change in their businesses.

And although Mehta believes executive pay may have gone “too far” in some cases, he believes a “lot of the backlash over executive pay is driven by a lack of visibility” with the board “failing to communicate” the reasons for its remuneration policies even where they are justified.

This lack of transparency was a key sentiment behind the executive remuneration group’s report in April. It called for pay committees to follow basic principles: transparency, shareholder engagement, accountability and flexibility. It added that remuneration should be “tailored to the individual needs of the company” and everyone should understand how measures such as bonuses were calculated.

While the group stopped short of suggesting a cap on earnings it branded payment policies in UK listed companies “not fit for purpose” and criticised the continuous rise in top-level salaries. And it said penalties should apply to CEO salaries where the company had performed poorly, while remuneration structures for executive directors should be able to apply to other employees in the organisation. Legal & General, whose CEO Nigel Wilson was part of the group, went further and argued company chiefs should be forced to disclose how many times larger their own pay packets were than the average of their employees - a policy the John Lewis Partnership has applied (see above).

Significantly, the report got the backing of the Institute of Directors (IoD), whose membership includes CEOs of multinational organisations. This suggests the tide is turning against sky-high executive pay, even among CEOs themselves. IoD director general Simon Walker says it is “increasingly clear” there is a problem with top pay levels at large listed companies and the “current approach to remuneration is failing”.

It is a bold statement, but it sums up the anger and exasperation among shareholders, employees and the public. Instead, there is a move towards greater transparency and accountability. Sainsbury’s CEO Mike Coupe - the lowest-paid big four CEO - noted last week the supermarket’s policy of transparency had resulted in 99% of the board voting in favour of his remuneration. And as Walker says, revamping executive pay polices could go “a long way to restoring trust”.