Stakeholder capitalism and its impact on CEO pay

Research by the High Pay Centre shows that by 2pm on 5th January this year, UK FTSE 100 company chief executives had already earned an average of £33,000 – the same as the median salary for a UK worker. This ‘High Pay Day’ came earlier than last year’s (9am on 7th January) as salaries have risen by 39%.

In the context of the worst economic circumstances many can remember, there have been numerous calls to balance the distribution of incomes more evenly. Remuneration plans are increasingly popular, but do incentive structures need reviewing in order for more ethical long-term practice?

The rise of stakeholder capitalism

The concept of stakeholder capitalism, which puts greater emphasis on the responsibility of businesses towards their wider stakeholders, is gaining traction. However, executive pay levels are now higher than ever before in many countries, creating a disconnect between CEO compensation and the need to address global inequalities and the cost of living crisis.

Research has highlighted this disconnect, with CEO pay in the US having risen to 324 times that of the average worker. In some countries, CEO pay has grown faster than company profits and employee wages combined. Many large companies share their moral dedication to DEI practices, but the issue of equity can become blurry when it comes to the subject of pay. Andy Jassy, Amazon’s chief executive, for example, earned nearly $213mn in 2021, while the median Amazon employee earned just under $33,000. That’s a CEO pay ratio of 6,474:1.

An evolving landscape

This heightened focus on shareholders over other stakeholders has resulted in CEO pay becoming increasingly disconnected from the performance of their companies. Critics have argued that CEO remuneration should be more closely linked to their company’s long-term success, rather than simply boosting their own personal wealth.

Experts suggest that CEO compensation should be more closely related to the wider mission of a company, and their commitment to creating a fairer and more equitable society, rather than simply rewarding individual performance.  CEO pay should be aligned with the corporate social responsibility (CSR) goals of a company, and CEO compensation packages should include more measures to hold them accountable.

Reviewing executive pay structures

The need to redefine stakeholder capitalism should involve more than just corporate responsibility, but economic reform. Many believe that in order to promote real long-term change, limits must be set on CEO pay. This would ensure that incentive plans are regularly reviewed and transparently reported. 

To ensure that incentives are structured fairly, companies should focus on engaging and understanding the needs of their employees. They must also provide clear explanations for why certain pay decisions were made, and how those decisions align with the company’s long-term goals.

Furthermore, governments must intervene to prevent excessive pay from escalating further by introducing caps and transparent reporting requirements. Compensation should be reviewed as part of this process. This would ensure that companies are held to account for their pay practices, and incentivise them to be more transparent and responsible in the way they set executive pay.

Ultimately, creating a fairer distribution of wealth requires sustained reform from both governments and businesses. Without action from both sides, those at the top will continue to benefit from the imbalance, while those at the bottom suffer. To achieve the UN’s Sustainable Development Goals everyone must work together in order to promote greater economic equality and combat poverty.

The world of executive pay is complex and ever-changing, but it can have a major impact on global inequalities. Transparent reporting is the first stop along this road. And that’s where we can help. SI Engage provides real-time visual data that your teams can put to immediate use. Creating customised stakeholder reports across funds, teams or the organisation is made simple to save you time.

Talk to us to find out more.

 

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