FTSE 100 CEO Pay Surges Amidst Talent Retention Concerns

British companies are significantly increasing chief executive pay, driven by concerns over retaining top talent and facing competition from higher compensation packages offered in the United States. Recent announcements from companies like Smith & Nephew, Rolls-Royce, and Shell demonstrate a growing trend of substantial pay increases for FTSE 100 bosses, with minimal investor backlash.

Smith & Nephew Doubles CEO Pay

Smith & Nephew recently doubled the maximum potential reward for its Chief Executive Officer, Deepak Nath, to $15.3 million. This increase is directly linked to the risk of losing Nath to a US-based company, as the medical devices company aims to align his compensation with that of his peers in the American market. Sybella Stanley, Smith & Nephew’s remuneration chair, stated the pay disparity created a “material risk” to retaining Nath, and recruiting a comparable successor would be difficult without competitive compensation [MarketScreener].

Deepak Nath was appointed Chief Executive Officer of Smith & Nephew in April 2022 [Smith+Nephew]. He brings global leadership and risk-management expertise, with a track record of driving growth at major healthcare companies [Smith+Nephew]. Prior to Smith & Nephew, Nath served as President of the Diagnostics business at Siemens Healthineers, responsible for $6 billion in revenue and 15,000 employees [Smith+Nephew]. He similarly held leadership positions at Abbott Laboratories and Amgen [Smith+Nephew].

Broader Trend Across the FTSE 100

Smith & Nephew is not alone in increasing CEO compensation. Rolls-Royce’s Tufan Erginbilgiç and Shell’s Wael Sawan have also received substantial pay increases this year. This shift marks a departure from 2019, when executive pay packages faced significant shareholder opposition. The current environment is characterized by increased acceptance of higher pay, particularly for leaders with international backgrounds and companies with substantial overseas operations.

Approximately one-fifth of FTSE 100 bosses reside outside the UK, further emphasizing the international nature of the blue-chip index.

Banking Sector Leads the Increase

The banking sector has seen particularly significant pay increases, with payouts reaching the highest levels in over a decade. Barclays’ CS Venkatakrishnan received a record £15 million, whereas Georges Elhedery at HSBC could receive up to £19.8 million if performance targets are met. Lloyds Banking Group and NatWest Group also increased their CEOs’ pay by 20% and 35%, respectively, last year.

Justification and Investor Sentiment

Companies are justifying these increases by pointing to improved share price performance and the need to compete for talent internationally. Rolls-Royce, for example, has seen its share price improve, and Lord Jitesh Gadhia, chair of the remuneration committee, emphasized the importance of competitive rewards to retain key talent. Shell increased Wael Sawan’s pay by 60% and benchmarked itself against international companies with similar revenues and asset sizes.

Investor sentiment appears to be more accepting of these increases, partly due to novel guidance from the Investment Association, which provides boards with more flexibility in setting executive pay. The IA has called for companies to provide specific rationales for pay increases and cautioned against generic justifications.

Concerns Remain

Despite the increased acceptance, concerns remain about the potential for unchecked pay increases. Andrew Speke, interim director of the High Pay Centre, noted that an emboldened business lobby feels confident in awarding large pay rises, knowing there is little to stop them. Some argue that benchmarking against peers can simply lead to a ratcheting up of pay across sectors.

WPP, whose shares are at a 17-year low, is seeking shareholder approval for a plan that could pay its new boss, Cindy Rose, as much as £11 million if targets are met.