Mind the gap: Investors’ role in balancing fairness and competitiveness in executive pay

Key points:

• Executive pay and the gap with average employee pay is often a contentious issue
• We believe investors should advocate for fairer compensation structures including greater variation and transparency
• Addressing pay inequalities can be beneficial for society, investors and overall economic growth

Executive pay can frequently be a contentious issue and has attracted renewed attention this year as remuneration committees have awarded inflation-busting pay package increases. These have often been justified as catch-up payments following the impact of the pandemic on company finances and in some cases due to ‘one-off’ windfall gains.

There are situations where these increases are justified, but when most employees receive smaller, or even below-inflation increases, we have a responsibility as investors to engage with companies on this anomaly.

Responsible investors should consider the needs of all stakeholders in investment decisions, including employees, and engage with companies about executive pay and the widening gap with average employee pay. Investors can ask whether companies have taken steps to support their lowest paid employees. Examples of this could be one-off payments, or prioritising the largest pay rises for the lowest paid workers.

Meanwhile, some companies have blamed large investors for encouraging a ‘skills drain’ by exerting engagement and voting pressure on executive pay policies.¹ This has reportedly put UK companies at a competitive disadvantage relative to US competitors by creating a substantial gap between UK and US pay levels.²

We believe investors should advocate for fairer compensation structures as inequalities can have unintended consequences for society, create instability and reduce economic growth. This is perhaps of even greater importance in times of economic hardship, when high inflation, especially in energy and food costs, has caused a cost-of-living crisis. This is all the more relevant in countries such as the UK, where some of the safeguards widely present in continental Europe are missing.

In this paper, we will explore different aspects of these issues, including:

• How widening the pay gap between employees and top executives is a risk for both investors and companies
• How investors and companies can work together to change remuneration structures for fairer pay packages